Diamond Top

A Diamond Top is a bearish reversal pattern that typically forms at the end of a strong uptrend. It earns its name because the outline of the price action resembles a diamond or tilted square. The pattern is characterized by:

• Broadening phase: Price first expands, with higher highs and lower lows, widening the range.
• Contracting phase: The range then narrows, forming lower highs and higher lows.
• Symmetry: Combined, the expanding then contracting swings create the “diamond” shape.
• Breakdown: The pattern is confirmed when price breaks below the lower boundary with volume.

Diamonds are usually seen after extended bull runs, marking distribution phases before trend reversal.

The Diamond Top captures a chaotic topping process:

• Broadening phase: After a long rally, volatility expands as bullish enthusiasm collides with emerging selling pressure. Bulls still push higher, but bears fight back, creating wider swings.
• Contracting phase: As the battle intensifies, the range begins to compress. Buyers lose strength, failing to make new highs, while sellers gradually gain the upper hand.
• Breakdown: When support finally gives way, it signals sellers have absorbed demand. Bulls caught buying the top exit in panic, accelerating the decline.

The emotional tone is confusion and transition — volatility first increases, then tightens, before the dam breaks.

Bulkowski’s research on diamond tops:

• Downward break frequency: ~69%.
• Failure rate: ~10%.
• Average decline after breakdown: ~21%.
• Pullback frequency: ~55%.
• Target met rate: ~65%.

Although not common, diamond tops are considered reliable bearish reversal signals when properly identified.

Entry:

• Conservative: Short when price closes below the diamond’s lower boundary.
• Aggressive: Enter short as the contracting phase weakens near the top boundary.

Stop loss: Above the last swing high inside the diamond or above the top boundary. 

Targets: Minimum = pattern height (widest point of the diamond) projected downward. Secondary = major support zones.

Invalidation: A sustained breakout above the top boundary invalidates the pattern.

• Rarity: Diamond tops are less frequent, so traders may mislabel noisy ranges as diamonds.
• Volume clue: Volume often spikes in the broadening phase, contracts in the tightening phase, then expands on breakdown.
• False breakdowns: Head-fakes below support are possible; waiting for a close below reduces risk.
• Symmetry matters: True diamonds have balanced expanding then contracting swings.
• Market context: Works best after extended uptrends where distribution is likely.

• If the “diamond” is misshapen, lacking both expansion and contraction phases.
• If the pattern forms too quickly (a few sessions) — it should take time to develop.
• If volume doesn’t contract into the narrowing portion.
• If overall market is strongly bullish, overriding local weakness.