Diamond

The Diamond formation, often referred to as a Diamond Top, is a relatively uncommon chart pattern.

This pattern typically emerges at the end of a prolonged price uptrend, signaling a potential reversal of the trend. The formation is characterized by an uptrend leading to the Diamond Top, which resembles a diamond tilted to one side.

In the initial “half” of the Diamond, the price action creates higher highs and lower lows, resulting in a broadening triangle. In the latter “half,” the pattern converges.

A Diamond Top formation produces a strong sell signal, as it clearly indicates a “Market Top!” Traders identify a diamond formation by first spotting a Head and Shoulders pattern, which consists of a peak and trough, followed by a higher peak and another trough, and concluding with a peak that is lower than the previous peak.

Four trendlines are drawn to outline the pattern: one ascending from the first peak to the second peak, one descending from the second peak to the third peak, one ascending from the second trough to the low of the third peak, and one descending from the first trough to the second trough.

These four lines collectively create a rough diamond shape, which is how the chart gets its name. The Diamond Top establishes an overall descending trend channel, enabling traders to identify support and resistance levels for the asset’s price as it transitions into a downtrend or experiences a temporary reversal.

However, if the lower support line of the channel is breached, traders may anticipate that asset prices will reverse and start to rise again.