What Does Diamond Top Formation Mean?
A technical analysis reversal pattern that is used to signal the end of an uptrend. This relatively uncommon pattern is found by identifying a period in which the price trend of an asset starts to widen and then starts to narrow. This pattern is called a diamond because of the shape it creates on a chart.
Investopedia explains Diamond Top Formation
Since technical traders use this pattern to predict a reversal of an uptrend, a short position is taken when the price falls below the lower ascending trendline. In general, price targets are usually set to be equal to the entry price minus the distance between the top and the bottom of the pattern.
A Diamond Top is considered a bearish signal, indicating a possible reversal of the current uptrend to a new downtrend.
Diamond patterns usually form over several months in very active markets. Volume remains high during the formation of this pattern. The Diamond Top indicates a reversal to a downtrend.
The Diamond Top pattern occurs because prices create higher highs and lower lows in a broadening pattern. Then the trading range gradually narrows after the highs peak and the lows start trending upward. The Technical Analysis occurs when prices break downward out of the diamond formation.