Below is a six-slide quiz to test your ability to identify broadening tops and trade them. Captions appear below the pictures in red for guidance, so be sure to scroll down far enough to read them.
1 / 5
A broadening top (outlined in red), begins with price rising into the chart pattern. The 'launch price' is at B. That's where a strong uptrend begins. Notice that
the stock returns to the launch price at C and coasts a bit lower than B (often C will remain above B). Volume trends downward in this example, as shown at D, but trends upward 67% of the time.
Price crosses the pattern plenty of times, touching the two trendlines at least 5 times (at least three touches of one side and two on the other). The breakout can be in any direction.
At A, a partial decline correctly predicts an upward breakout 74% of the time. Indeed, price breaks out upward in this case before busting the breakout and
heading to C.
2 / 5
Find as many broadening tops as you can. For help, click here.
3 / 5
Broadening top C shows a partial decline which correctly predicts an upward breakout. Broadening top D also shows a partial decline, but this one fails when price breaks out
downward. Pattern A is not a broadening top. It's a broadening bottom. I ignore any overshoot or undershoot (B) when determining a top or bottom. If you ignore the minor low at B, the
trend is downward into the pattern, making it a broadening bottom and not a top.
4 / 5
This is another broadening top. This one has a partial rise (A), which correctly predicts a downward breakout. How far will price drop? Where will it pause on the way
5 / 5
Price bar A is where price breaks out downward from the broadening top. Notice that price touches the green support line and zips up to B before heading lower. I drew additional green
lines from the valley to the left. Point C might look like the low, but it's not. Rather, price touches down slightly above the launch price of D at 48 in mid May (not shown).