There are a group of longer-term topping and bottoming patterns that include the three mountains, the three rivers, the three Buddha tops, inverted three Buddha, dumpling tops, fry pan bottoms, and tower tops and bottoms. Similar to the Western triple top, the Japanese have a three mountain top (see Exhibit 6.44). It is supposed to represent a major top. If the market backs off from a high three times or makes three attempts at a high, it is deemed a three mountain top. The high point of the final mountain should be confirmed with a bearish candlestick indicator (for example, a doji or dark-cloud cover).
If the central mountain of a three mountain top is the highest mountain it is a special type of three mountain called a three Buddha top (see Exhibit 6.45). The reason for this name is because, in Buddhist temples, there is a large central Buddha with smaller Buddhas (that is, saints) on both sides. This is a perfect analogy to a head and shoulders pattern.
Although the three Buddha top is an analogy to the Western head and shoulders pattern, the theory about the Japanese three Buddha pattern was used over a hundred years before the head and shoulders was known in America. (The earliest I have seen a reference to a head and shoulders pattern in the United States was by Richard Schabacker in the 1930s.
For those who are familiar with the Edwards and Magee classic book Technical Analysis of Stock Trends, much of the material in that book is based on Schabacker’s work. Schabacker was Edward’s father-in-law.). It is intriguing how market observers from both the West and the East have come up with the this same pattern. Market psychology is the same the world ’round, or, as a Japanese proverb expresses, “The tone of a bird’s song is the same everywhere.”
The three river bottom pattern (see Exhibit 6.46) is the opposite of the three mountain top. This occurs when the market tests a bottom level three times. The peak of the troughs should be exceeded to confirm a bottom. The equivalent of the Western head and shoulders bottom (also called an inverted head and shoulders) is called the modified three river bottom pattern or the inverted three Buddha pattern (see Exhibit 6.47).
Exhibit 6.48 is an unusual chart in that it has the various manifestations of the three mountain top. They are as follows:
Areas 1, 2, and 3 construct a three Buddha pattern because the central mountain is the highest of the three peaks. The top of the third mountain was an evening star line. The selloff which originated with the third mountain concludes at June’s morning star pattern.
Three price peaks occur at A, B, and C. Some Japanese technicians view the three mountain as three attempts at new highs, like three waves up. The third wave up is supposed to be a crest (the scenario in this instance). Three pushes to new highs and after the third failed push, the bulls surrender. The peak of the third mountain (c) was an evening star.
While some Japanese technicians view a three-stage rise as the three mountains, others view the three mountains as repeating tests of the same price peaks. This is what develops at areas C, D, and E. Area D signals a top via a dark-cloud cover; E signals with a hanging man followed by a doji.
Each of the three mountains in Exhibit 6.49 illustrate bearish candlestick evidence. Area 1 is a bearish engulfing pattern, area 2 is a hanging man followed by two doji, and area 3 is another bearish engulfing pattern. Since the central mountain formed the highest peak in Exhibit 6.50, this pattern became a three Buddha pattern. The black real body within the prior white real body formed a harami at the peak of the high central mountain.
As illustrated in Exhibit 6.51, there was an inverted three Buddha pattern in 1988 (that is, similar to an inverted head and shoulders). Each of these bottoms at A, B, and C had a bullish candlestick indication. At A, a hammer appeared. At B, another hammer appeared that was part of a morning star pattern (the morning star rally ended with the dark-cloud cover). At C, a piercing line appeared (it was almost a bullish engulfing pattern). Once the bulls gapped above the downward sloping resistance line, the trend turned up.
Gaps are called windows by Japanese technicians. (Windows will be discussed at length in the next chapter on continuation patterns.) Because I refer to gaps in this chapter, the reader should note that the Japanese view gaps (that is, windows) as continuation patterns. Thus a gap higher is bullish and a gap lower is bearish. In this example, the gap higher had bullish implications. The price activity from the third quarter of 1989 into the first quarter of 1990 effected a three Buddha top.
In order for the three river bottoms (including this one) to provide a buy signal, there should be a close via a white candlestick above the peaks of the troughs (see Exhibit 6.52). In this case, it would be above $102. Notice how this $102 then converted to support on the selloff in March.