One of the patterns I use to identify tops after a "blow-off" price run is the "Double Top Symmetry" pattern. I identified it after studying the stock tops in the 1987 Dow, the 1990 Nikkie and the 1929 Dow.
It consists of the following:
- A strong advance taking prices well above the 200 day moving average
- A break of the uptrend line of the price advance
- An A-B-C-type correction to a spike low or a double bottom
- A weak price advance from the low that doesn't take RSI back to previous highs
- Another double top
- A break of the rising wedge pattern that forms from the double top
Lets take a look at some examples - First, from the XAU in 2004 -
And more famously, from the NASDAQ in 2000 -
While the double top symmetry pattern leads to great risk/reward trades, it is not infallible. This double top symmetry pattern showed up in the European Growth Issues index last year. It looked to set up perfectly, except instead of a melt down, stocks melted up.
The reason I bring it up right now is that the NASDAQ is putting in a nice "Double Top Symmetry" pattern right now.