Top Trap

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Initial release 1/29/2021. I renamed the setup from Top Trap to Bearish Top Trap on 4/8/2021.

Bearish Top Trap: Overview

What happens when price rises in a steady trend, builds a major peak, and then a bullish chart pattern appears? Answer: The bullish chart pattern is likely to fail or not work as well as expected.

I show that scenario in the adjacent chart. Price rises in a steady uptrend. The uptrend need not be a straight-line run up, but there needs to be an uptrend for a major top to form.

After the uphill run, the stock peaks and often goes sideways. The top is rarely flat and need not look horizontal at all. Rather, price is often choppy looking, with lots of up and down swings as the stock moves sideways, waiting for a new trend to form.

At the end of the horizontal move, price will drop some and you'll see a bullish chart pattern appear. The pattern, such as a double bottom, will confirm (price will rise above the top of the pattern) and perhaps move higher somewhat, but the uptrend will falter and die. Price will then head lower and fall below the bottom of the chart pattern. Most likely, a new downtrend will begin which takes price lower.

In short, be wary of trading a bullish chart pattern if it forms immediately after and slightly below a top. To win, the stock will have to push through all of that overhead resistance and that's a struggle many don't meet. Price drops, likely busting the upward breakout from the chart pattern and leaving the trader with a loss.

Bearish Top Trap: Identification Guidelines

Here's a list of guidelines to look for to see if your stock qualifies for a bull trap. Refer to slide one in the chart which follows.

Bearish Top Trap: Examples

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This is an example of what I'm calling The Bearish Top Trap (all charts are on the daily scale but I've seen this on the weekly, too). Price rises, loosely following the red line. Eventually, the stock peaks and begins to move sideways. I show that at B.

At the end of B, the stock often dips some and forms a bullish chart pattern (I think the dip is important because it makes it harder for price to push through all of that overhead resistance). This can be any chart pattern, not just a double bottom (DB) as shown here. The pattern confirms as valid when price closes above the blue line, C. The stock only climbs to D before dropping.

If you use the Patternz program (free, available for download at the link), load up Arista Networks (ANET) stock, look for a double bottom starting at 10/11/2018.

Next slide: Another example

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In this example, the stock (Amedisys: AMED) trends upward from the left of the chart and then moves sideways for a time (horizontal red line). A double/triple bottom appears (circled) slightly below the base of the top. The chart pattern confirms, the trader buys into the stock (blue dot), the green dot shows the ultimate high, and the red dot shows where the trader was stopped out. Notice that the bullish pattern failed and that it formed slightly below the base of the top (below the horizontal red line).

Next slide: Another example

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This is a chart of American Woodmark (AMWD) of a double bottom starting on 18 February 2014. Price confirms the pattern and entry occurred at the blue dot.

Price climbed to the green dot, the ultimate high, and then reversed. At the red drop, price triggered the stop loss order, completing the potentially losing trade.

Next slide: Another example

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This is a chart of Amazon.com stock (AMZN), showing a double bottom on 22 March 2013. Price climbs in a bumpy uptrend (red line), forms a top (horizontal red line) and then a double bottom appears (DB). Trade entry happens at the blue dot, the green dot is the ultimate high, and when price drops to the blue line, A, the red dot signals the stop triggered.

Price didn't drop far (pink dot, the ultimate low) before rebounding.

I penciled lightly in pink a diamond top chart pattern. The breakout from this pattern was upward and the stock continued to move higher (not shown).

Next slide: Another example

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This is a Bearish Top Trap pattern in Amgen stock (AMGN). Price rises following the red line, peaks, and then forms a head-and-shoulders bottom (S-H-S pattern) without much of a horizontal move in the stock before the chart pattern appeared. I show this chart to emphasize that it's not just double bottoms that show the Bearish Top Trap setup.

Price confirms the head-and-shoulders at the buy signal (blue dot) and climbs to A before retracing, forming a second peak, retracing the depths of the two shoulders going into July before rising to the ultimate high (green dot). After that, the stock slides.

Patternz picked the sell target price (red dot) which happened on the same day as the ultimate high. Entry was at 162.25 and sale at 178.10, so there was money to be made in this trade.

Next slide: Another example

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This is a double bottom in Amedisys stock (AMED) on 27 July 2017. Price trends upward into a peak, backtracks to form a wide double bottom. The blue dot signals the trade entry.

Notice that this is another example where the stock didn't move sideways much, so as a trap, it's flawed (meaning price is more likely to rise as one would expect).

Price retraces to the ultimate low (pink dot), before rising and hitting the sell target (red dot) and continuing higher.

In other words, this Bearish Top Trap wasn't a trap at all. Yes, price retraced after the entry signal but recovered to make a new high. In the best cases, look for a horizontal line of resistance to form at the top followed by a bullish chart pattern slightly below the base of that top. Price then struggles to cut through overhead resistance and make a new high, often failing to do so.

Next slide: Another example

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This is another example of a Bearish Top Trap. Price climbs, forms a top, and then a bullish head-and-shoulders bottom appears (SHS). The chart pattern breaks out upward but within a day or two, the stock gaps lower, hitting the stop loss order and closing out the trade.

Remember the Bearish Top Trap: Nice upward trend, horizontal move, slight dip before a bullish chart pattern appears, and then failure. Not always, but enough to catch my attention and to avoid these kinds of bullish setups.

We're done!

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Bearish Top Trap: More Examples

Bearish Top Trap: Patternz Setup

Shown on the right is the Patternz setup form for the trading simulator. From Patternz's Main Menu, highlight some stocks and click on the Simulator button. The Simulator Form will appear. Click on Setup and the form (shown) appears.

From top to bottom, I want the program to pause at the breakout. That's because I place a buy stop often at the breakout price, so it simulates how I trade. It gives me a chance to set the price target while the program fills in the other targets.

The middle circle sets the buy price and the stop price for me, automatically. The stop will be a penny below the bottom of the chart pattern. The buy price is the day after price closes above the top of the chart pattern. That's later than I usually trade, but it's fine.

The bottom red circle in the picture is so the program loads enough prior history for me to find support and resistance areas, so I can use them to predict how far price will rise.

Not highlighted in the figure is Show circles. Those are colored circles which tell me where the ultimate high or low are, the buy price, and stop price. The colors match the headings in the grid on the simulator form.

In the Simulator (see the Patterns form), I chose to find double bottoms (all types), triple bottoms, head-and-shoulders bottoms, and rectangle bottoms. I'm only interested in trading patterns with upward breakouts, so if a rectangle has a downward breakout, I skip it and load the next pattern.

Bulkowski on the Bearish Top Trap

Bearish Top Trap: Overview

Bearish Top Trap: Identification Guidelines

Bearish Top Trap: Examples

Bearish Top Trap: More Examples

Bearish Top Trap: Patternz Setup

See Also