The V ^Top is a powerful reversal price pattern seen in all markets, instruments, time frames, & price ranges. It is an unusual & very distinctive pattern in that there is a sharp trend switch from one direction to the other ‘seemingly’ without warning. A market top or bottom is often difficult to identify but this pattern represents an aggressive shift in momentum and typically this turn in price direction is with high volume at or just after the turn. The price action presents with the immediate background environment as bullish with strong up-trending action. The V ^Top usually marks an intermediate or long-term change in trend & is therefore considered to have a definite bearish bias.
Visually the V ^Top pattern resembles an upside-down V. Traders often refer to them as an ‘ugly’ head & shoulders top reversal pattern. The immediate bullish trending action in the background has the V ^Top swing high to low price action fitting in a steep channel with a straight line run of price. This creates the reversal potential for price to develop with a high degree of symmetry & an aggressive trader is looking for an equally sharp descent off the peak.
A break of the lower channel line is considered to be the first sign of a break of support for the V ^Top. Traders may also determine a horizontal immediate support line based on the background price action pre-ceding the peak creation & this is called a ‘neckline’. Typically the peak, or immediately after, traders will look for an expansion of volume from the bears to note conviction. The spirit of the pattern highlights a ‘dramatic’ episode with a rapid exchange between buyers & sellers & it may not look perfect. Ultimately the ‘final’ picture is not complete until a confirmed breakdown has cleared support. The beauty of the V ^Top pattern is the potential for multiple entries along the path once a trader can see the sellers are in control. The final break of support &/or the angle of the neckline will often be a ‘trader nuance’ to determine. Even after trading back down to support a trend reversal is not complete. Breaking through support & with conviction seen in volume completes the V ^Top Reversal. Often but not always, there is a test of this newly created resistance & this effort offers a final consideration for a short entry into a potential change of trend.
Note that in the uptrend there may be many potential tops in price along the way up, but until significant support is broken, a reversal cannot be confirmed & traders should respect the trend.
While this pattern is fairly straightforward it should be noted that traders often ‘jump the gun’. While spikes or thrusts offer a lot of drama they do not necessarily offer a good risk:reward ratio. In addition, they do not all produce a change of trend & traders need to remember that the trend is in force until proven otherwise. Top formations can take some time and often it takes a break of a more significant support before a major change of trend. Patience is often a virtue.
Options for Trading the V ^Top as a bearish reversal pattern:
First note that often this pattern happens so quickly a trader is not offered much time to recognize it and then respond. It is not a pattern for the faint of heart and it is highly recommended to have a very defined plan in place with risk:reward clearly determined. There are 4 methods of trading this pattern & it depends on your trading style.
Most Aggressive traders will be looking for an entry short before or with a break of the sloping lower parallel or bullish channel trendline. Entries in this area can work with a stop placement just above the highest high of the formation. Aggressive traders should be prepared to take quick action both in profits and in stop adjustment with any additional drama as thrusting action is the ‘spirit’ of the pattern.
Aggressive traders may wait & then monitor the action through the middle of the reverse pattern. The concept of this option is to identify the reversal price action as being contained in a support/resistance ‘box’. Traders monitor the middle ‘muddy trench’ of the spread in price offered by the pattern for an entry once the bears control. Stop placement can be fairly tight just above the trench zone. This can be an accurate trade looking to capitalize on a breakdown & potentially a new bearish trend but without the risk of the most aggressive option.
Classic traders will look for a short entry with the breakdown of the neckline or immediate pattern support. Stop placement right above the neckline price.
Conservative traders will watch the breakdown & look for a re-test of that new breakdown resistance price to hold for full confirmation of the V ^Top reversal pattern. Stop placement right above breakdown price. Note that this method of waiting for this pullback may or may not offer an opportunity but statistically it has a high % of success when it does present.
The aggressive trading methods can highly increase the profit potential of any V ^Top & may offer more than one entry. However, the trader needs to assess whether the ‘extra’ profits choosing an earlier entry offers a decent risk:reward over waiting for some confirmation of action based on clearing a defined price support. Traders choosing these options should look for strength from sellers in combination with the lack of buyers. It cannot be stressed enough that volume is a major key & an expansion of bearish volume aids confirmation.
False breakouts do happen & confirmation needed is always a traders’ choice. Several methods that apply here for either intrabar &/or close bar options offered in sequence: breakdown below support price, retrace holds new resistance line, price clears breakdown swing low price, price clears next swing low of background uptrend price action, larger chart combination.
Stop placement considerations for all trade entry choices can be aggressively lowered after the breakdown of the price.
Measured Move Target based on structure of the V ^Top Reversal Pattern
- V ^Top Pattern measure (subtracted from) Breakdown price = target
- V ^Top Pattern measure = (swing high price of pattern (minus) swing low price of pattern)
Since the V ^Top Reversal Pattern once confirmed has such a high degree of success indicating a change of trend, there are additional target considerations based on the knowledge that history repeats. All traders can look for tests on each of the swing lows seen in the immediate background uptrend price action. At any point & for all of these options, traders should gauge the continued conviction of the bears based on momentum. If momentum is strong stick with the trade, if they get ‘lazy’ then consider taking profits.
Examples: Clean charts to study the dramatic switch in direction seen with the volume during each component of the formation of the V ^Top Reversal Pattern.