The Third Leg as an Intermediate Top.

Aashish said:
You had made an interesting comment this morning on CNBC about the 3rd leg usually accounting as the intermediate top…Could you please elaborate a bit more on that?

My Notes: For some reason, three moves in one direction is the sign of the trend reaching a short term saturation.

case 1. Elliot Waves, where three moves in the primary trend (Wave 1, 3 & 5) signal short term exhaustion.

case 2. Head and SHoulders, where three tops or bottoms are formed.

case 3. Broadening formation, where thre points are required on one side to confirm the pattern.

So we come to the three drives pattern (this is different from another pattern based on Fibonacci ratios).

In case of a rally,

(a) Two higher tops are made. A trendline is drawn connecting these tops. A third rally begins which exceeds the trendline (showing exuberance).

(b) A momentum indicator like the RSI, CCI or Stochastics shows bearish divegemce.

Sell when prices retreat from the third top, giving a sell signal by closing below the nearest swing low. An intermediate top may be in place.