Broadening Top Complete Guide

What is Broadening Top?

The Broadening Top is a bearish reversal chart pattern that typically forms at the peak of an uptrend, signaling a potential shift from bullish to bearish sentiment. Visually, it resembles an inverted symmetrical triangle or a megaphone, characterized by a series of expanding price swings. The pattern forms with at least two progressively higher highs and two progressively lower lows, creating diverging trendlines where the upper line slopes upwards and the lower line slopes downwards. This expansion reflects increasing volatility and indecision among market participants; bulls push prices higher, but bears respond by pulling them even lower, with each successive swing covering a wider price range. According to Thomas Bulkowski's research in 'Encyclopedia of Chart Patterns,' Broadening Tops are reliable reversal signals, with approximately 93% of breakouts occurring to the downside. Volume characteristics during the pattern's formation are often erratic but tend to show an overall increase, particularly on the downswings, confirming the growing distribution and market uncertainty. While a strong indicator of reversal, Bulkowski ranks its overall performance for meeting price targets lower (30th out of 39 patterns), with an average decline of about 19% after a confirmed downward breakout. Throwbacks or pullbacks to the breakout level are common, occurring in about 66% of cases.

Identification Rules

1. A clear prior uptrend must be evident before the pattern begins to form.
2. The pattern must exhibit at least two progressively higher highs and two progressively lower lows, indicating expanding volatility.
3. Two diverging trendlines can be drawn: an upward-sloping upper trendline connecting the higher highs, and a downward-sloping lower trendline connecting the lower lows.
4. The pattern should typically span a minimum of 20 bars (or approximately three weeks, as per Bulkowski's observations) to be considered valid.

References

• Thomas N. Bulkowski (2005). Encyclopedia of Chart Patterns.
• Steve Nison (2001). Japanese Candlestick Charting Techniques.

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