3 Peaks and the Domed House

[RichardCox 10]

3 Peaks and the Domed House

 

When markets are showing a strong uptrend, contrarian traders will generally be looking for opportunities to identify reversals and establish short positions. When traders are first starting out, some of the methods for accomplishing this might include an oversold reading on the Relative Strength Index (RSI), or a failure at a closely watched region of historical resistance. Trades based off of more complicated structures, however, can yield better results as you will need to see a larger number of elements acting in agreement with one another. One example here includes the 3-Peaks and Domed House pattern, which is more complex and relatively unique in that it combines multiple patterns into one. The advantages of this patterns can be seen in its ability to pick tops in an uptrend and to project the magnitude of the downside moves that are likely to follow.

 

Ideal Example

 

First, we look at the general structure of these topping patterns to make them easier to identify once encountered. These price intervals and relationships would mark an ideal formation. In real-time trading there can be variations but the overall shape and price points will need to be present in order for the patterns to be valid. If price points are missing or the structure is out of proportion, trading positions should be avoided as the pattern would be invalid. Here is the ideal structure:

 

 

As you can see, the 3 Peaks and Domed House pattern requires the formation of two separate price shapes: an initial structure with three price peaks, and than this is followed by another structure that can be described as looking similar to a domed house. Next, we will break down these two components:

 

The 3-Peaks Structure:

 

• Starts at Points 1-2 which form a base
  
• Sharp rise in prices occurs to Point 3
  
• Points 3-7 make the “three peaks”
  
• Price than drops in three unfolding waves, falling to Point 10
  

 

The Domed House Structure:

 

• The second base starts with a rebound from Point 10
  
• The rally is composed of two corrective waves that run through Points 11-14 (without this double-correction, the beginning of the Domed House structure is not valid)
  
• The left “wall” of the House is formed by the price rally to Point 15
  
• This is than followed by a sideways movement (the “roof” for the “first floor” of the House) that runs from Point 15 to Point 20
  
• Prices then rise to Point 21, forming the “left shoulder” of what will become a Head and Shoulders pattern through Point 25
  
• Point 23 marks the highest price point at the “head” of the short term Head and Shoulders pattern (can also be thought of as the top of the Dome, or the “roof” on the “second floor” of the House)
  
• Right “shoulder” forms at Point 25
  
• A sharp drop then follows through Point 26 and Point 28, in a move that forms the right “wall” of the Domed House
  
• Projected moves for the decline to Point 28 can be found at the price equivalent to Point 10
  

 

Time Frames

 

When we see a 3-Peaks and Domed House pattern unfold, it is important that the normal completion time can take longer than most of the price patterns that are commonly used in technical analysis. This is because most of the traditional price patterns are singular in nature, and our pattern here does not follow that limitation. For example, if we are using a daily chart, the 3-Peak element would generally take around eight months to complete. The Domed House portion of the pattern would generally require around seven months to complete. So it is important to remember that these types of patterns require patience in order to make sure that all of the required elements are actually in place.

 

Of course, this pattern is not solely visible on the daily charts, and any time frame can be used when basing positions on these events. But what is most important is that each corrective wave unfolds in its proper place and that the structure is appropriately proportioned.

 

Reverse Variation

 

Technician George Lindsay is widely accredited with discovering the presence of this pattern but the introduced an additional variation, as well. Specifically, this means that the 3-Peaks portion of the structure does not necessarily have to precede the Domed House. As such, the ideal Domed House and 3-Peaks pattern would look like this:

 

 

In this variation, you will notice that there are no significant changes to the generalized price moves other than the fact that the Dome comes first. It is important to note, however, that Point 1 and Point 28 are marked at the same price level. When determining your price target, your projection comes at Point 10, which will be equal to Point 28/1.

 

Real-Time Examples

 

Ideal examples are great for understanding what a broad structure is “supposed” to look like. But when we are actively trading, this might not work out perfectly and this can make certain structures more difficult to visualize and identify. Here, we will look at a real-time example of the trade at work. This example uses the more traditional structure, where the 3-Peaks portion of the pattern comes first.

 

 

In the example above, we can see the initial 3-Peaks unfold at Points 3,5, and 7. All three Points forming at the same level would be an extremely rare occurrence (especially in light of the following structures), so some leeway and flexibility needs to be given. What is most important is the number of corrective wave structures and the overall proportionality of both pattern elements. This does occur in the initial structures and we have now reached Point 23, which is the highest peak of the entire pattern. Traders should now be alert to potential shorting opportunities, and sell trades can be taken after prices break the neckline of the short term Head and Shoulders pattern. This comes as prices hit Point 26.

 

Traders should wait for a small bounce in this area and trades should be executed at Point 27, with stop losses placed above Point 25. This is visible in the chart below, with the short trade entry seen at the thin red line, and the stop loss placed at the thicker red line.

 

 

Now that our short trade is established, we will need to start focusing on potential price targets. The projected gain is essentially the distance between the blue lines, which is roughly the distance from Point 27 to Point 28, which we would want to place safely above the projection area at Point 10. This can be seen in the chart below:

 

 

Conclusion: The 3-Peaks and Domed House Pattern Creates Opportunities For Contrarian Traders

 

In the final chart, we can see that the initial structure (reaching the high at Point 23) was validated in a number of different ways. Not only did the chart elements meet the criteria for the 3-Peaks and Domed House but we have added factors as well. If we view these structures differently (as in the final chart), we can see that there are also instances important support levels start to break and a long-term uptrend channel becomes invalidated. All of these events point toward sell positions, and if we were to add an indicator reading (which might suggest that price conditions have become overbought), we would essentially have a perfect storm for new sell positions. Overall, this two-part price pattern is complex in nature, but when all of these elements are identified there can be excellent trading opportunities for those looking to establish contrarian positions near long-term highs.

[tradingwizzard 10]

3 Peaks and the Domed House

 

When markets are showing a strong uptrend, contrarian traders will generally be looking for opportunities to identify reversals and establish short positions. When traders are first starting out, some of the methods for accomplishing this might include an oversold reading on the Relative Strength Index (RSI), or a failure at a closely watched region of historical resistance. Trades based off of more complicated structures, however, can yield better results as you will need to see a larger number of elements acting in agreement with one another. One example here includes the 3-Peaks and Domed House pattern, which is more complex and relatively unique in that it combines multiple patterns into one. The advantages of this patterns can be seen in its ability to pick tops in an uptrend and to project the magnitude of the downside moves that are likely to follow.

 

Ideal Example

 

First, we look at the general structure of these topping patterns to make them easier to identify once encountered. These price intervals and relationships would mark an ideal formation. In real-time trading there can be variations but the overall shape and price points will need to be present in order for the patterns to be valid. If price points are missing or the structure is out of proportion, trading positions should be avoided as the pattern would be invalid. Here is the ideal structure:

 

 

As you can see, the 3 Peaks and Domed House pattern requires the formation of two separate price shapes: an initial structure with three price peaks, and than this is followed by another structure that can be described as looking similar to a domed house. Next, we will break down these two components:

 

The 3-Peaks Structure:

 

• Starts at Points 1-2 which form a base
  
• Sharp rise in prices occurs to Point 3
  
• Points 3-7 make the “three peaks”
  
• Price than drops in three unfolding waves, falling to Point 10
  

 

The Domed House Structure:

 

• The second base starts with a rebound from Point 10
  
• The rally is composed of two corrective waves that run through Points 11-14 (without this double-correction, the beginning of the Domed House structure is not valid)
  
• The left “wall” of the House is formed by the price rally to Point 15
  
• This is than followed by a sideways movement (the “roof” for the “first floor” of the House) that runs from Point 15 to Point 20
  
• Prices then rise to Point 21, forming the “left shoulder” of what will become a Head and Shoulders pattern through Point 25
  
• Point 23 marks the highest price point at the “head” of the short term Head and Shoulders pattern (can also be thought of as the top of the Dome, or the “roof” on the “second floor” of the House)
  
• Right “shoulder” forms at Point 25
  
• A sharp drop then follows through Point 26 and Point 28, in a move that forms the right “wall” of the Domed House
  
• Projected moves for the decline to Point 28 can be found at the price equivalent to Point 10
  

 

Time Frames

 

When we see a 3-Peaks and Domed House pattern unfold, it is important that the normal completion time can take longer than most of the price patterns that are commonly used in technical analysis. This is because most of the traditional price patterns are singular in nature, and our pattern here does not follow that limitation. For example, if we are using a daily chart, the 3-Peak element would generally take around eight months to complete. The Domed House portion of the pattern would generally require around seven months to complete. So it is important to remember that these types of patterns require patience in order to make sure that all of the required elements are actually in place.

 

Of course, this pattern is not solely visible on the daily charts, and any time frame can be used when basing positions on these events. But what is most important is that each corrective wave unfolds in its proper place and that the structure is appropriately proportioned.

 

Reverse Variation

 

Technician George Lindsay is widely accredited with discovering the presence of this pattern but the introduced an additional variation, as well. Specifically, this means that the 3-Peaks portion of the structure does not necessarily have to precede the Domed House. As such, the ideal Domed House and 3-Peaks pattern would look like this:

 

 

In this variation, you will notice that there are no significant changes to the generalized price moves other than the fact that the Dome comes first. It is important to note, however, that Point 1 and Point 28 are marked at the same price level. When determining your price target, your projection comes at Point 10, which will be equal to Point 28/1.

 

Real-Time Examples

 

Ideal examples are great for understanding what a broad structure is “supposed” to look like. But when we are actively trading, this might not work out perfectly and this can make certain structures more difficult to visualize and identify. Here, we will look at a real-time example of the trade at work. This example uses the more traditional structure, where the 3-Peaks portion of the pattern comes first.

 

 

In the example above, we can see the initial 3-Peaks unfold at Points 3,5, and 7. All three Points forming at the same level would be an extremely rare occurrence (especially in light of the following structures), so some leeway and flexibility needs to be given. What is most important is the number of corrective wave structures and the overall proportionality of both pattern elements. This does occur in the initial structures and we have now reached Point 23, which is the highest peak of the entire pattern. Traders should now be alert to potential shorting opportunities, and sell trades can be taken after prices break the neckline of the short term Head and Shoulders pattern. This comes as prices hit Point 26.

 

Traders should wait for a small bounce in this area and trades should be executed at Point 27, with stop losses placed above Point 25. This is visible in the chart below, with the short trade entry seen at the thin red line, and the stop loss placed at the thicker red line.

 

 

Now that our short trade is established, we will need to start focusing on potential price targets. The projected gain is essentially the distance between the blue lines, which is roughly the distance from Point 27 to Point 28, which we would want to place safely above the projection area at Point 10. This can be seen in the chart below:

 

 

Conclusion: The 3-Peaks and Domed House Pattern Creates Opportunities For Contrarian Traders

 

In the final chart, we can see that the initial structure (reaching the high at Point 23) was validated in a number of different ways. Not only did the chart elements meet the criteria for the 3-Peaks and Domed House but we have added factors as well. If we view these structures differently (as in the final chart), we can see that there are also instances important support levels start to break and a long-term uptrend channel becomes invalidated. All of these events point toward sell positions, and if we were to add an indicator reading (which might suggest that price conditions have become overbought), we would essentially have a perfect storm for new sell positions. Overall, this two-part price pattern is complex in nature, but when all of these elements are identified there can be excellent trading opportunities for those looking to establish contrarian positions near long-term highs.

 

Hi Richard,

 

Interesting to say the least but....

 

not a bit too complicated?....where is the old buy the support sell the resistance? )))

 

joking here...thank you for your great article.

 

TW