An expanding top pattern, also known as a broadening top or megaphone pattern. It is characterized by a series of higher highs and lower lows, resulting in the formation of two divergent trendlines that gradually move apart from each other. This pattern indicates increasing volatility and uncertainty in the market.
Key characteristics of an expanding top pattern:
1. Trendlines: The pattern is defined by two trendlines – an upper trendline connecting the series of higher highs and a lower trendline connecting the series of lower lows. These trendlines create a widening or expanding formation over time. See how we have drawn these on the DAX daily chart. This indicates that buyers and sellers are actively participating in the market, but their lack of consensus leads to a widening price range.
2. Volatility: Expanding tops are associated with rising market volatility and indecision among traders. The price swings become wider as the pattern develops, reflecting alternating periods of bullish and bearish sentiment. This increase of volatility is a phenomenon that I have seen many times during periods of reversals in markets.
3. An expanding top pattern is typically seen as a reversal pattern, which places the bull move on the DAX in jeopardy. It's important to note that while it's a reversal pattern, it doesn't necessarily guarantee a reversal will occur. We need to wait for confirmation.
4. Duration: The pattern normally takes time to develop (over weeks and sometimes months as in this case). The widening range and increased volatility contribute to the longer formation time.
5. Volume: Volume analysis is crucial when identifying this pattern. Generally, volume should increase as the pattern develops, particularly during the formation of new highs and lows. A decrease in volume as the pattern progresses might indicate weakening momentum.
6. Confirmation: Traders typically look for a breakout below the lower trendline to confirm the validity of the pattern and the potential reversal. Once the price breaks below the lower trendline with strong volume, it may signal a bearish trend reversal.
While the expanding top pattern can provide insights into potential trend reversals, it's not foolproof. False signals can occur, however given the markets failure at its previous high, the risk is increased that we will see a slide lower.
Key characteristics of an expanding top pattern:
1. Trendlines: The pattern is defined by two trendlines – an upper trendline connecting the series of higher highs and a lower trendline connecting the series of lower lows. These trendlines create a widening or expanding formation over time. See how we have drawn these on the DAX daily chart. This indicates that buyers and sellers are actively participating in the market, but their lack of consensus leads to a widening price range.
2. Volatility: Expanding tops are associated with rising market volatility and indecision among traders. The price swings become wider as the pattern develops, reflecting alternating periods of bullish and bearish sentiment. This increase of volatility is a phenomenon that I have seen many times during periods of reversals in markets.
3. An expanding top pattern is typically seen as a reversal pattern, which places the bull move on the DAX in jeopardy. It's important to note that while it's a reversal pattern, it doesn't necessarily guarantee a reversal will occur. We need to wait for confirmation.
4. Duration: The pattern normally takes time to develop (over weeks and sometimes months as in this case). The widening range and increased volatility contribute to the longer formation time.
5. Volume: Volume analysis is crucial when identifying this pattern. Generally, volume should increase as the pattern develops, particularly during the formation of new highs and lows. A decrease in volume as the pattern progresses might indicate weakening momentum.
6. Confirmation: Traders typically look for a breakout below the lower trendline to confirm the validity of the pattern and the potential reversal. Once the price breaks below the lower trendline with strong volume, it may signal a bearish trend reversal.
While the expanding top pattern can provide insights into potential trend reversals, it's not foolproof. False signals can occur, however given the markets failure at its previous high, the risk is increased that we will see a slide lower.
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