Diamond Tops

Core idea

A diamond top is mechanically identical to a diamond bottom — broadening then narrowing, with trendlines forming a diamond silhouette — but it appears at the end of an upward price trend. That difference flips the statistics. Upward breakouts (continuations) underperform almost every other pattern in Bulkowski's catalogue (rank 33 of 39 with a 29% average rise). Downward breakouts (reversals) earn rank #3 with strong declines.

Diamond tops also exhibit a useful "launch price" tendency: when the pattern reverses downward, price often returns to the price level where the prior strong rally launched — giving you a natural target without guessing.

Bulkowski's framing: "It's as if diamond tops are bearish patterns and an upward breakout suffers while a downward breakout thrives." The shape doesn't lie about its preferences.

Why it matters

Most reversal patterns at tops are easier to see (head-and-shoulders, double tops, rounding tops) but offer less explosive moves. The diamond top is harder to spot — that's the edge. It also gives a structural reason to expect a deep decline: the broadening phase represents exhausted demand with both bulls and bears taking equally extreme swings; the narrowing phase represents capitulating demand as bulls stop showing up at higher prices.

The "return to launch price" heuristic is unusually useful here because most reversal-pattern targets are based on pattern height, which can overestimate or underestimate based on which part of the move you measure. Launch price is a real swing point — visible, defended once, and a natural magnet on the way back down.

Why the pattern direction is "almost random"

Bulkowski reports that diamond-top breakouts favor the downward direction but only slightly — the direction is "almost random." That's the key signal. Almost random means: don't try to predict; let price tell you. The fact that downward breakouts perform so much better than upward ones means the post-confirmation expected value strongly favors short positions when the pattern breaks down.

Key takeaways

Mental model

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Practical application

Example

A consumer-discretionary stock runs from $40 to $58 in three weeks on a positive earnings revision — a sharp, near-vertical move. Launch price = $40. Over the next six weeks, price swings widen: highs at $60, $62.50, $63.80, lows at $56, $54.20, $53. Then they tighten: highs of $60.50, $58.80, $57.50, lows of $54.50, $55.20, $56.10. The diamond silhouette is visible after trendlines are drawn.

On day 39, the stock closes at $55.40 — below the lower trendline. Confirmed downward breakout. The trader shorts at $55.30, stops at $58.90 (just above the most recent minor high), and sets a target at $40 (the launch price). The downside risk is $3.60 against a potential $15.30 reward — better than 4:1.

The stock pulls back to $57.50 over the next eight days (pullback). The trader holds because the stop is at $58.90. Volume expands on the resumption of the decline. Over the next two months the stock falls to $42 — slightly above the launch-price target. The trader covers at $43 for a $12 gain on the short, a 22% return.

Notice what the launch-price heuristic did: it gave a target before entry, made the risk/reward visible, and provided a natural exit even when the post-breakout decline accelerated. Most bearish reversal patterns make you compute targets from pattern height; diamond tops let you read the target off the chart.

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