tops

No trend lasts forever. Inevitably, crowd enthusiasm outpaces a stock's fundamentals and
rallies stall. But topping formations do not end uptrends all by themselves. These
stopping points may only signal short pauses that lead to higher prices. Then again, they
could be long-term highs just before a major breakdown.
What hidden patterns can you use to identify and trade reversals before your competition
sees them? Successful short-term traders get in the reversal door early and allow the herd
to trigger sharp price movement. Familiar trend-change formations, such as the Head and
Shoulders and Double Tops, take so long to develop that many profitable entries pass
before they finally signal an impending break to the waiting crowd.

First Rise/First Failure offers traders an early method to identify reversals following
new highs or lows in any time frame. FR/FF identifies the first 100% retracement of a
dynamic trend move within the time frame of interest. In order for any trend to continue,
price movement should find support near a 62% retracement, measured from the starting
point of the last thrust that pushed price to the new high or low. From this pullback, trend
must base and test its extension before it can break out to further continuation highs or
lows.

Cross-verification rings
a loud bell. Note how
the uptrend line broke
on the same bar as the
violation of the 62% fib
retracement following
this late 1998 AMZN
explosion. The familiar
triangular shape of
First Rise -First Failure
makes identification
easy when flipping
through many price
charts.
100%

100% retracement violates the major price direction and terminates the trend it corrects.
Completion also provides significant support/resistance, where bounce trades can be
initiated with low risk. From this point, continuation trends may reawaken in the next
larger time frame by a new break through the 38% (prior 62%) S/R and continued push
past the 62% retracement, toward a test of the high/low extension.
Bounce reversals represent superb entry points when the 100% violation coincides with a
38% or 62% retracement of the next higher dynamic time frame. However risk: reward
requires careful measurement, as the trade may develop more slowly than expected. In
other words, a successful position must be held through expected congestion at the 38%-
62% zone before it can access a profitable retest of the double top/double bottom
extreme.
Allow minor testing violations for all major Fibonacci retracements before taking
positions. Specialists and Market Makers know these hidden turning points and conduct
stop-gunning exercises to take out volume just beyond the breaks. And watch out for
trend relativity errors. Bull and bear markets exist simultaneously through different time
frames. Limit FR/FF trades to the time frame for which the retracement occurs unless
cross-verification supports other setups.
Every popular topping formation has its own unique pattern features. But all tell a
common tale of crowd disillusionment. Whether printed in the manic highs and lows of
the Head & Shoulders or the slow capitulation of the Rising Wedge, the final result
remains the same. Price breaks sharply to lower levels while unhappy shareholders
unload positions as quickly as they can.

Early in a rally, value and improving fundamentals attract knowledgeable holders. But as
an uptrend develops, the motivation for new participants becomes vastly different. News
of a stock's rise generates excitement and attracts a greedier crowd. These momentum
players slowly outnumber the value investors and stock movement becomes more
volatile. The issue continues upward as this frantic buying crowd feeds on itself well
beyond most reasonable price targets.
Both fire and ice will kill uptrends. As long as the greater fool mechanism holds, each
new long allows the previous one to turn a profit. Eventually changing conditions force a
final end to the upside action. A shock event can suddenly kill the buying enthusiasm,
forcing a sharp and immediate reversal. Or the trend’s fuel just runs out as the last
interested buyer enters one last position.

Many traders mistakenly assume bulls turn into bears immediately following a dramatic,
high volume reversal. They enter short sales well before the physics of topping and
decline rob the crowd of its momentum. In fact, these early shorts provide fuel for the
sharp covering rallies seen in most topping formations.
Skilled traders wait and measure the process of crowd disillusionment before they enter
large short sales. Decline characteristics can be predicted with great accuracy using
pattern analysis. While they wait, the repeating character of the topping event provides a
natural playground for swing positions.

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