The market has had a mighty run, but many of the stocks in my database are forming my favorite reversal pattern–the 1,2,3 Top. A couple of folks have asked me about it, so I thought I would post some charts as a refresher. Most of the ones I’m currently trading all have huge bearish divergences on the weekly charts, greatly contributing to the pattern’s reliability.

For those not familiar with the 1,2,3 Top (or 1,2,3 Bottoms) the pattern is based on the classic market dynamic that almost all significant tops, or bottoms, consist of 3 moves–# 1 is an initial thrust that ends a trend, followed by #2 a pullback as the smart money takes profits, then #3 is a retest of highs as late comers want another shot at glory. The pattern completes as price trades below #3 and forms a pivot. Short on the close of the move below #3, and the stop is above the high of #3, or #1, whichever makes the most sense. The lowest risk is to short on the close below the #3 low, so you need to adjust the number of shares traded based on money management. I particularly like 1,2,3 Tops because they tend to trap late buyers who quickly sell their shares when they realize the up move is failing. Look for lower volume on move #3 and increasing volume on the move down.

As I cycle through my database I’m seeing many stocks in various stages of the pattern. Traders say that when the averages are forming a top, 1/3 of the stocks will peak before the top (probably now), 1/3 will peak along with the averages, and 1/3 after the averages peak. So, I’m looking for a host of 1,2,3 Top opportunities over the next few weeks, or short trades after half-hearted bounces as the stocks correct.

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Grant Cooke

Sustainable Energy Associates

gcooke@sustainableenergyassc.com

925-989-7117