Diamond Top Chart Pattern
The diamond top and bottom pattern "<>" consists of a broadening pattern "<" where the price range increases in height from left to right followed by a triangle ">" where the price range shrinks in height from left to right. A diamond top is distinguished by the price trend increasing before the diamond formation; in contrast, a diamond bottom is distinguished by the price trend decreasing before the diamond formation. A breakout move upward occurs when price penetrates above the downward sloping resistance line (the top slope "\" of the triangle ">").

Diamond Bottom Chart Pattern
A breakout move downward occurs when price penetrates below the upward sloping support line (the bottom slope "/"of the triangle ">").

Diamond Top Breakout Direction

Diamond Bottom Breakout Direction
Bulkowski's (2005) research states that the diamond top breaks downward 69% of the time and the diamond bottom breaks upward 69% of the time. The majority (58%) of diamond tops are preceded by "a steeply rising trend", which increases the likelihood of a break downward and a mirror of the prior upward price movement (i.e. 82% of the time the downward move will be at least the same percentage move as the upward price move leading to the diamond top) (Kirkpatrick & Dahlquist, 2010, p. 321). Bulkowski (2005) emphasizes that a diamond bottom with a breakout move downward is ranked as being one the best performing patterns.

Diamond Top Average Maximum Breakout Gains and Declines

Diamond Bottom Average Maximum Breakout Gains and Declines
The expected averaged maximum percentage price move before a 20% countertrend move of the diamond top pattern is 27% for an upward breakout and 21% for a downward breakout; whereas a diamond bottom pattern has an averaged maximum price move of 36% for an upward breakout and 21% for a downward breakout (Bulkowski, 2005).

Price Targets
Suggestions for trading the diamond top and bottom are given by Kirkpatrick & Dahlquist: the price target is usually the same as the distance price moved to reach the diamond pattern; however, if the price move after the breakout is sluggish, the position should be closed out or tight protective stops should be implemented (2010, p. 322). Bulkowski (2008) gives more precise breakout targets:

  • Diamond Bottom Upward Breakout Price Target:
    • Breakout Price + ((Highest Peak of Diamond Pattern - Lowest Valley of Diamond Pattern) * 81%)
  • Diamond Bottom Downward Breakout Price Target:
    • Breakout Price - ((Highest Peak of Diamond Pattern - Lowest Valley of Diamond Pattern) * 63%)
  • Diamond Top Upward Breakout Price Target:
    • Breakout Price + ((Highest Peak of Diamond Pattern - Lowest Valley of Diamond Pattern) * 69%)
  • Diamond Top Downward Breakout Price Target:
    • Breakout Price - ((Highest Peak of Diamond Pattern - Lowest Valley of Diamond Pattern) * 76%)
Diamond Top Chart Example
The chart above of the Nasdaq 100 ETF (QQQ) illustrates a steep price climb crowned with a diamond top and then a sharp fall in prices. The broadening part of the pattern had three peaks creating the upward sloping resistance line and two valleys creating the downward sloping support line. Similarly, the triangle part of the pattern had three peaks creating the downward sloping resistance line and two valleys creating the points to create the upward supporting support line. Note, that if a trader were to use the price target of the distance of the prior up move subtracted from the breakout price, the trader would have missed out on gains unless they used a tight stop loss. However, if they used Bulkowski’s more conservative price target, the trader would have locked in a nice profit.

Diamond Bottom Chart Example
The chart above of Cisco Systems (CSCO) shows a very tight diamond bottom with an upward breakout. After a sharp two day price move downward, price range begins to expand creating the broadening pattern half of the diamond and then the price range begins to contract creating the triangle portion of the diamond. In this example, the price move downward distance added to the breakout price of the diamond bottom would have resulted in a successful trade.

Works Referenced
  • Kirkpatrick II, C.D., & Dahlquist, J.R. (2010). Technical Analysis: The Complete Resource for Financial Market Technicians (2nd ed.). Upper Saddle River, NJ: FT Press.
  • Rockefeller, B. (2011). Technical Analysis For Dummies (2nd ed.). Hoboken: John Wiley & Sons.
  • The Pattern Site. (2008). Bulkowski's Measure Rule. Retrieved June 1, 2012, from http://thepatternsite.com/measure.html
  • The Pattern Site. (2005). Bulkowski's Diamond Bottoms . Retrieved June 1, 2012, from http://thepatternsite.com/diamondb.html
  • The Pattern Site. (2005). Bulkowski's Diamond Tops . Retrieved June 1, 2012, from http://thepatternsite.com/diamondt.html

Source : FinVids.com