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Written by and copyright © 2005-2010 by Thomas N. Bulkowski. All rights reserved.
For more information on this pattern, read
Encyclopedia of Chart Patterns, Second Edition  ,
pictured on the right, pages 196 to 212. That chapter gives a complete review of the chart pattern, including tour, identification guidelines, focus on failures, performance statistics, trading tactics, and sample trade. Below is just a sliver of the information contained in the book.
Diamond tops with upward breakouts in a bull market rank near the bottom for performance. Like
diamonds bottoms, the top variety (with downward breakouts) show a fast decline post breakout if a quick rise lead to the diamond reversal. The
crash site (downtrend end) is often near the price level of the launch site (uptrend start).
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Diamond Top
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Score your chart pattern for
performance by clicking
here |
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Important Bull Market Results
Overall performance rank for up/down breakouts (1 is best): 21 out of
23; 7 out of 21
Break even failure rate for up/down breakouts: 10%; 6%
Average rise/decline: 27%; 21%
Throwback/pullback rate: 59%; 57%
Percentage meeting price target for up/down breakouts: 69%; 76%
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Identification Guidelines
| Characteristic | Discussion |
| Price trend | Upward leading to the pattern. |
| Shape | Looks like a diamond, but one usually tilted to the side. |
| Trendlines | Prices form higher peaks and lower valleys (a broadening pattern) in the first part of the pattern, then price action narrows with lower peaks and higher
valleys. Trendlines connect the peaks and valleys for a diamond shape. |
| Touches | Prices will touch each trendline once or twice. Don’t worry if your lines cross some of the price outliers. |
| Volume trend | Downward trend 67% of the time. |
| Breakout | Downward 69% of the time. |
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Trading Tips
Consult the associated figure on the right.
| Trading Tactic | Explanation |
| Measure rule | See the measure rule figure to the right. Compute the
height from the
highest peak (A) to the lowest valley
(B) in the pattern and then multiply it by the above
“percentage meeting price target.”
Add it (upward breakouts, point A) or subtract it
(downward breakouts, point B) from the breakout
price to get the price target (C). |
| Price trend | See the price trend figure to the right. If price makes a
quick, nearly vertical rise (A)
leading to the diamond and the breakout is downward, expect price to drop back to
the price at which it started (B)
the rise. Also, price must have something to reverse. Diamonds with short-term
(less than three months) price trends leading
to the diamond perform best post breakout. |
| Half staff | See the half staff figure to the right. If the diamond
acts as a continuation pattern, meaning that price exits (C to D) in the same direction as
it entered the pattern (A to B), then the diamond can act as a half-staff
pattern (half the move is still ahead). The move after the breakout (CD) will often fall
short, so look for overhead resistance
where price might stall. |
| Price velocity | High velocity moves after the pattern often follow high velocity moves leading to the pattern. |
| Yearly middle | For best performance, diamonds with breakouts in the middle third of the yearly price range perform best, but samples are few, so don’t depend on this one. |
| Volume trend | A rising volume trend results in the best post breakout performance. |
| Throwbacks and pullbacks | Throwbacks and pullbacks hurt post breakout performance. |
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The Measure Rule
Price Trend
Half Staff
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Example
The above figure shows an example of a diamond top chart pattern. Price begins the rise at point A and then forms the diamond top. The breakout from this diamond top is downward but it does not
last long. Price pulls back and busts the diamond when price closes above the top of the diamond top chart pattern.
The rise is also short and price plunges, stopping at B, near the launch price of A.
Other Examples
-- Thomas Bulkowski
Copyright © 2005-2010 by Thomas N. Bulkowski. All rights reserved. Madness takes its toll. Please have exact change.
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