Three Falling Peaks Pattern
The three falling peaks pattern is preceded by an uptrend and the pattern itself suggests a break further to the downside. There are three peaks, the second peak's high price is less than the first peak's high, and the third peak's high is less than the second peak's high. The peaks should be fairly similar in width. The suggested sell signal is triggered when prices close below the low price established by the valley between the second and third peaks.
Psychology of the Three Falling Peaks
The market psychology of the pattern is as follows: An uptrend occurs prior to the pattern. One of the traits of a downtrend is that the trend makes lower highs and lower lows. The second peak in the three falling peaks pattern is a lower high. The second valley after the second peak is a lower low. The definition of a new downtrend is complete. The third peak is a lower low which confirms the downtrend. Once prices break below the second valley low, traders short sell expecting that the next valley will be a lower low thus confirming the downtrend yet again.
Average Maximum Decline of Three Falling Peaks
Bulkowski (2005) claims that the averaged maximum decline before a 20% retracement is 17%; and that prices pullback to the breakout signal price within 30 days 59% of the time.
Bulkowski (2008) suggests the following price target of the three falling peaks pattern:
Bulkowski also suggests placing a stop loss at the high of the third peak.
Three Falling Peaks Chart Example
The chart above of Wal-Mart (WMT) illustrates well the three falling peaks pattern. The pattern is preceded by an uptrend, higher highs and lower lows, with the first peak of the pattern acting as the highest high of the prior uptrend. Prices fall from the first peak and create the first valley, which in this chart happens to still be a higher low from the previous uptrend. The second peak of the pattern is a lower high, an early sign of a trend shift. The second valley of the pattern is a lower low. Now the chart is presenting a lower high and a lower low. The third peak is a confirmation of the new downtrend. When prices break below the low of the second valley, traders are betting on prices falling to a lower low, which in this chart example, it does. Note that using Bulkowski's price target method, a trader would be able to lock in profits even though the price pulled back to the breakout price and more in this chart.
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