Broadening Tops and Bottoms

ASIA PACIFIC’S PREEMINENT TRADING MAGAZINE ™
TM
www.tradersjournal.com Volume 5 Issue 9
The 3-Steps System To

Win At Trading
Trading Broadening
Top/Bottom Patterns
The Hamster On
The Wheel
Gold Bull Seasonals
The Power Of The
10-Year Cycle
Where Most People
Get It Wrong
ISSN 1793-2149
Being Honest
MICA (P) 103/07/2009
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TECHNICAL ANALYSIS
SURI DUDDELLA
Trading
Broadening
Top/Bottom
Patterns
8
TECHNICAL ANALYSIS
Broadening top and bottom

patterns are considered
reversal patterns and usually
appear at the major tops/
bottoms. Suri Duddella
discusses how to identify
and trade these reliable
chart patterns.
B
roadening top and bottom patterns were first may also include small minor swings. The key swings
described in Richard Schabackers’ book Tech- of the pattern are the first and the fifth swings, which
nical Analysis and Stock Market Profits as rare show the reversal of major direction prior to the forma-
and intricate patterns. These patterns are considered tion of the pattern. Another unique characteristic of
reversal patterns and usually appear at the major tops/ broadening top/bottom patterns are that each swing’s
bottoms. This pattern is similar to the “head and increasing volatility triggers the reversals of upside and
shoulders” pattern and may be also called a “mega- downside swings.
phone” or “inverted triangle pattern.”
Broadening pattern formations have five distinct
swings. Each swing is larger than the previous swing,
which gives the formation its broadening appearance. Fibonacci Ratio-based Swings
The swing points in the pattern are connected by two Most geometric trading patterns exhibit Fibonacci ra-
diverging trendlines. Pattern formation has lower low tio relationships in their swings. By that, each swing
troughs and higher high peaks. Each of these swings has some Fibonacci ratio factor to prior swings. Broad-
10 SEPTEMBER 2009 / VOL. 5 ISSUE 9

TECHNICAL ANALYSIS
ening patterns exhibit this characteristic. Each swing Broadening Failures

has a 1.27 to 1.62 extension ratio to prior swings in Broadening patterns are highly reliable but not infalli-
price and time. ble. They trade better in longer-term timeframes than
in shorter timeframes. Like most pattern failures,
broadening pattern failure moves are explosive in the
opposite direction. A critical area of retest and failure
Broadening Wedges is the mid-channel line. In many cases of failure, the
Broadening patterns forming with slightly angled rally/decline stops at the mid-line to retest the prior
trendlines (both should be moving in the same up/ trendline. Usually, the failure occurs on the last swing
down direction) connecting the tops and bottoms are before a clear breakout/breakdown occurs.
called “broadening wedges.” This pattern is also de-
fined as a “broadening ascending wedge” or “broad-
ening descending wedge.” Broadening wedges have
Example – Broadening Bottom Failure
similar characteristics to conventional wedges. Broad-
In this example, S&P e-mini futures were declining
ening wedges form at market troughs and peaks and
during the morning of August 5, 2009 and showed
have high reliability. On breakout and breakdown
a potential broadening bottom formation. At 11.00
levels of the trendlines, these patterns become very
AM, this pattern started forming its 5th swing to
volatile once the pattern is complete.
complete the pattern. Around noon, the midline was

tested repeatedly and signaled a broadening bottom the upside and the trade would be from the bottom of
failure before a clear breakout occurred to the upside. the trendline.
Price Targets
Trading Broadening Patterns The price targets in broadening top/bottom patterns
Broadening patterns present two trading opportuni- for trading breakouts is the pattern height or the verti-
ties. cal distance of the 5th swing (prior to the breakout/
breakdown) subtracted from the breakdown point (in
case of a broadening top) and the pattern height is
added to the breakout point (in case of a broadening
1. Trading the breakout
bottom).
2. Trading the last swing (5th swing, from 4 to 5) in-
side the pattern The target in trading the last swing in the broadening
patterns would be the trendline on the opposite side
of the pattern. Historically, this would be the widest
part of the pattern and is a very profitable target.
Trading the Breakout
When trading a breakout, the trade is taken in the di-
rection of the breakout/breakdown from the pattern.
When a price bar closes outside the pattern in the di- Stops
rection of the breakout/breakdown, and another price When trading broadening patterns, the “mid chan-
bar is followed by a close above the high of the previ- nel line” in the pattern is the critical point and trades
ous bar (for breakouts) or a close below the low of the should be protected with a stop at this level. When
previous bar (for breakdowns), a trade is triggered. trading the last-swing, the stops should be placed out-
side the trend line to protect the trade.
Trading the Last-Swing

A great opportunity is presented in broadening pat- Example 1 – Broadening Top Breakdown
terns in trading the last-swing. There are five swings in In Example 1, Broadcom exhibited a broadening top
a “broadening pattern.” If the trend formation in the formation from early 2004 to July 2004. The last
pattern is to the upside, trading the fifth-swing would swing (4-5) was completed in early July at around
be to the downside and would be traded from the top $32. A short trade was triggered when price reversed
trendline. Similarly, if the trend direction before the from the top trendline and closed below the previous
pattern is to the downside, the fifth swing would be to bar’s low. A stop was placed above the top trendline
SEPTEMBER 2009 / VOL. 5 ISSUE 9 13

TECHNICAL ANALYSIS
(above Swing 5). The
first target was placed be-
low swing 4 to reach the
trend line. A second tar-
get is placed the “pattern
height” below the trend
line’s breakdown level.
The height of the 4-5
swing is used to compute
the breakdown target at
around $16.50.
Example 2 – Broaden-
ing Bottom Breakout
Example 2 shows Adobe
Corporations’ (ADBE)
daily chart’s broadening
bottom pattern. From
early January 2008 to
late March 2008, ADBE
made lower lows and
higher highs to form a
broadening bottom pat-
tern. On April 24, 2008,
ADBE traded above the
high of $37.50 and trig-
gered a breakout trade.
A stop was placed below
the trendline around
$35.50. A price target is placed
100% of the pattern height above
the trend line around $43.50.
Example 3: Broadening Top with a

Midline Failure
Example 3 shows a weekly chart of
a Goldman Sachs’ (GS) broadening
top pattern. From early 2007 to ear-
ly 2008, GS made higher highs and
lower lows and formed a broaden-
ing top pattern. Around $250, GS
made the 5th swing high to complete
the pattern. In late March 2008, a
breakdown trade was anticipated
but prices never closed below the
lower-trendline. On May 2, 2008
price traded at midline 205.70. This
was the first clue that GS may break
below the trendline. The following
week, a short trade was triggered at
$185, when prices closed below the

low of the mid channel line. A stop was placed above Suri Duddella is the author of a new book Trade Chart Patterns
$205.70. The first target was placed at the trendline Like The Pros. Suri is a private trader and has been trading full
and a second target was placed the last-swing height time futures and equities markets for the past 14+ years. Suri
(4-5 swing) below the breakdown level. can be reached at suriNotes@gmail.com and his website is:
http://www.surinotes.com
SEPTEMBER 2009 / VOL. 5 ISSUE 9 15

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ASIA PACIFIC’S PREEMINENT TRADING MAGAZINE ™

www.tradersjournal.com Volume 5 Issue 9

The 3-Steps System To

Broadening top and bottom

10 SEPTEMBER 2009 / VOL. 5 ISSUE 9

ening patterns exhibit this characteristic. Each swing Broadening Failures

12 SEPTEMBER 2009 / VOL. 5 ISSUE 9

Trading the Last-Swing

SEPTEMBER 2009 / VOL. 5 ISSUE 9 13

Example 3: Broadening Top with a

14 SEPTEMBER 2009 / VOL. 5 ISSUE 9

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