Bearish Tower Top Candlestick Pattern
The Bearish Tower Top candlestick pattern is a bearish reversal candlestick pattern. Bearish Tower Top candlestick patterns typically develop at the end of an extended run in a stock’s share price.
This candlestick pattern consists of a series of candlesticks, unlike other candlestick patterns which are mostly single candlestick patterns. Therefore, a Bearish Tower Top candlestick pattern is identified through a series of observations since the candlestick pattern takes several trading periods for it to develop.
When a tall green candlestick pattern develops at the end of an extended run-up in the stock’s share price, and then the next couple of candlesticks fail to push higher than the close of the tall green candlestick, you may be witnessing the development of a Bearish Tower Top candlestick pattern in process.
Requirements
These are the requirements for a Bearish Tower Top candlestick pattern.
- There are 2 tall candlesticks separated by 2-5 candlesticks with smaller real bodies than the 2 tall candlesticks on the left and right borders of the pattern
- The 1st tall candlestick usually has a green colored real body, but it can also be red colored
- The 2nd tall candlestick’s real body is usually red colored, but can also be green in very volatile markets
- The 1st tall candlestick usually has a green colored real body, but it can also be red colored
- The real bodies of the 2 tall candlesticks on the left and right borders of the pattern approximate each other in size
Characteristics & Observations
These are some of the trading and investing characteristics for Bearish Tower Top candlestick patterns, as well as some of my personal observations I have developed over the years.[s2If !current_user_can(access_s2member_level1)]…..
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- The development of a Bearish Tower Top candlestick at the end of an extended, well developed uptrend is usually a major topping signal
- From on Elliott Wave perspective, a Tower Top candlestick pattern tends to develop in a Wave 5 of an Impulse wave pattern of some degree
Bullish Counter-Part
The bullish counter-part to a Bearish Tower Top candlestick pattern is a Bullish Tower Bottom candlestick pattern. These candlestick patterns usually signal major turning points in a stocks trend.
The difference between Bearish Tower Top candlesticks and Bullish Tower Bottom candlesticks is where they develop in the stock’s trend.
A Bearish Tower Top candlestick develops at the end of well-defined uptrend where as a Bullish Tower Bottom candlestick develops at the bottom of a well-defined downtrend.
Resistance Area
The resistance area for a Bearish Tower Top candlestick pattern is the top of the 2 tall candlesticks on the left and right borders of the pattern.
As with any resistance area, a close above the resistance area is needed to negate it. When the price does close above the resistance area, it should be on buying volume that is above average. More than 1 close is usually recommended also before considering the resistance area “negated”.
Trading Strategies
I will review 2 different trading strategies for this bearish reversal candlestick pattern. The first strategy will review scaling-out of a position that you hold when the candlestick pattern develops. The second and more aggressive strategy will involve entering into a short sale position based on further anticipated declines in the share price.
Always be sure to step back and analyze the “trend of one larger degree“. This can help you determine if the pullback is going to be shorter-term in nature or if it is the start of something extremely more bearish in nature.
If You Are Currently Long the Stock
You may have noticed other sell signals flashing before the development of the Bearish Tower Top candlestick pattern. If you did and already scaled out of a few shares, congratulations. If that is not the case and you are still holding all your shares, you will want to begin a scale-out process. Use the very first re-test of the resistance area as an opportunity to make a scale-out sale.
If a potential Bearish Tower Top candlestick pattern is developing, consider using the re-test of the previous high from the 1st tall candlestick as an area to scale-out of some shares.
If the re-test of the resistance area fails, as it usually does on the first re-test, another scale-out sale could be made. That would leave you with about 1/3 of your holdings left. I prefer to use a 3 step scale-out process. If you want to be sure to lock in gains at higher prices, you can be more aggressive and use a 2 step scale-out process. You can determine what you want to do with the last 1/3.
One thing to keep in mind is the scale of the chart where you see the Bearish Harami candlestick. Is it a daily chart? Is it a monthly chart? The scale of the chart will help to determine the speed in which your selling actions need to take place.
For example, if you notice a Bearish Harami candlestick pattern develop on a monthly candlestick chart, you may have 1-3 weeks to execute the scale-out process and try to maximize profits. But be quick because a larger drop is coming. When a Bearish Harami candlestick pattern develops on a daily candlestick chart, you may between 1-3 days to execute the scale-out process.
It is very important to keep everything in perspective based the scale of the chart you are analyzing. Also use other technical analysis methods for confirmation rather than relying on the candlestick pattern by itself. These other method can help to provide additional areas that can be used as scale-out areas once the downtrend is confirmed.
If You Are Looking to Short the Stock
Since this candlestick pattern is a major top indicator, the trading strategy would be to sell the stock short as soon as the price breaks below the 2nd tall candlestick in the pattern. Ensure that selling momentum and selling volume are both increasing. Selling volume should be well above normal trading volume.
A MACD Histogram is a great tool to use when monitoring buying and selling momentum. Make sure there is an increase in the selling momentum along with selling volume after the development of the Bearish Tower Top candlestick pattern. Any slow down in selling momentum is an early indicator to start analyzing the charts and thinking about locking in short sale profits. This is simply done by purchasing shares to cover the shares sold short.
Since prices tend to move down quicker than they move up, short selling can be a very profitable trading strategy. However, it does carry the additional risk of “unlimited losses” when compared to going long on a stock. You need to know when to lock in losses in order to be a successful short seller. If you have a hard time selling anything for a loss, don’t use short-selling as a strategy. If you are not quick to pull the trigger on a loss, that loss can start leading to exponentially larger losses.
In order to minimize risk on a short position, only enter into a short sale trade after capitulating buying volume takes place. Look for a Climax Top volume spike. A capitulating volume spike helps to confirm the bearishness of a Bearish Tower Top candlestick pattern.
Stop-Loss on Short Sale
To try and minimize risk, a stop-loss order should be used on all short trading strategies. For a Bearish Tower Top candlestick pattern, place the stop-loss order in 1 of 2 places:
- at the closing price of the 2nd tall candlestick pattern
- place the stop-loss order a little above the 50% retracement of the 2nd tall candlestick in the pattern if you want to try to avoid being shaken out of the new position
After forming the 2nd tall candlestick in the Bearish Tower Top candlestick pattern, any meaningful downtrend should not be able to retrace past the 50% Retracement point of the 2nd tall candlestick. Instead, the selling volume should be starting to increase along with the selling momentum on the MACD Histogram.
Real Chart Examples
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