Tower Top and Tower Bottom Candle Trading

TOWER TOPS AND BOTTOMS

The tower top unfolds at high price levels. During a rally, there is a short-term lull after one or more white candles. Then one or more large black candles emerge. This creates a top with a white and black "tower" on either side of the small real bodies (see Exhibit 4.59). That is, long candles on the way down and long candles on the way up.

Exhibit 4.59. Tower Top

The tower bottom (see Exhibit 4.60) occurs in a descending market in which one or more tall black candles keep the bearish momentum intact. Then some small real bodies lessen the bearish tone and finally a tall white candle finalizes the tower bottom.

Exhibit 4.60. Tower Bottom

The closest Western comparison to the tower top and bottom would be the spike, or V, reversal. In the spike reversal, the market is in a strong trend and then abruptly reverses to a new trend.

The tower top and bottom, like some other candlestick signals such as three black crows, may be most useful for longer- term traders since the tower is often finalized late in the move.

The tower bottom is analogous to the frypan bottom while the tower top is similar to the dumpling top. The main distinction between these two patterns is that long black and white candles are needed for the towers and there is no gap required. The dumpling top and frypan bottom require gaps. 

Exhibit 4.61. CNB Bancshares-Daily (Tower Top and Dumpling Top)

Exhibit 4.61 highlights the difference between the tower top and the dumpling top. The stock moved up in the first week of October with a series of white real bodies and then started treading water with a series of small real bodies. The gap down on October 15 formed a dumpling top. Shifting our attention to late December, we see a series of extended white candles. Candle line 1 was still healthy, but the small real bodies following 1 illustrated that this stock had a poor chance of rising. The long black candle at 2 was the second "tower" needed to complete the tower top.

In Exhibit 4.62, a hammer in late December hinted of stabilization. The rally from the hammer continued with a tall white candle on December 29. However, as the stock got within shooting distance of a resistance area from early December near $35.75, a group of small real bodies arose. The December 30th candle made a harami pattern. The harami pattern and the spinning tops signaled caution. The trend turned more ominous with the emergence of the January 5 long black real body that completed the tower top.

Exhibit 4.62. Ducommun-Daily (Tower Top)

As discussed earlier, sometimes tower tops send out a signal late in the move (since we have to wait for a black candle). In this case, however, the reversal signal a la the harami came early. Indeed, the December 30 candle was so tiny that it could be viewed as a harami cross.

A classic tower bottom is shown in Exhibit 4.63. The first tower consists of an extended black real body on July 28. The next day's doji makes a harami cross. (Observe another harami cross at H on July 24 and July 25. Once the index broke under that pattern, any bullish applications of that particular harami cross were voided.) The ascent from the late July harami cross began with a couple of small white real bodies with the longer- term turning signal arising with the tall white candle on August 3, since this completed a tower bottom. The rally con¬tinued from this tower bottom until late August when the S&P staled at the resistance area set by the July 17 shooting star.

In Exhibit 4.64 a hammer on April 1 hinted that the market was groping for a bottom. The long black candle the next day, with a marginal close under the hammer's support area (the

Exhibit 4.63. S&P-Daily (Tower Bottom)

Exhibit 4.64. Illinois Tool Works-Daily (Tower Bottom)

Exhibit 4.65. Yen/Dollar-Weekly (Tower Bottom)

low of the hammer's lower shadow), puts the trend back down. A series of small real bodies emerged immediately after this black candle. This mitigates much of the bearish implications of the aforementioned black candle. The stock's health further improved with the April 12 long white candle. This was the second tower of the tower bottom (with the April 2 black candle being the first tower).

Although the stock was propelled sharply higher after the tower bottom, remember that this tower bottom had nothing to do with the extent of the move. As was discussed before, and I want to emphasize again, candles are potent turning signals, but don't give price targets.

An arrow in Exhibit 4.65 points to a long black real body that propelled the market to a new low for the move. A small white real body followed this bearish candle, forming a harami pattern. An extended white body followed six weeks of consolidation and thus completed a tower bottom.