What are Descending Tops?

The term “descending tops” is used to describe the appearance of charts used to track securities, stocks, and other indicators of the health of a market. In order to explain descending tops, it helps to visualize a chart tracking something like daily values for a stock. All financial charts have peaks and troughs, reflecting rises and falls in value. In the case of descending tops, the peaks grow steadily lower, indicating that the value is falling. Depending on the current status of your economy, you may be able to see some examples of descending tops in the financial pages of the newspaper.

Many people view descending tops as a sign that the market may be turning “bearish,” meaning that an overall recession or decline in value is about to occur. This is not always the case, however. Sometimes descending tops appear in an isolated instance, reflecting the fact that a particular stock or security is experiencing a downturn, but the market as a whole may be perfectly healthy.

The opposite of descending tops is ascending tops, in which the successive peaks go ever higher, indicating that value is rising. Ascending tops are viewed as a positive, since they indicate that the market for whatever is being charted is healthy. Investors try to get in at the lowest peak, and watch their profits rise along with the peaks. The trick, of course, is picking the moment to divest before value falls again.

As a general rule, widespread descending tops across a range of industries and securities is a bad sign, as it suggests that the market as a whole is experiencing a downturn reflected in a price depression. It is also a bad sign when the overall value of a stock market appears in the form of descending tops over an extended period, or when the consistent trend for a day is downwards.

Learning to read financial charts can take some time. Long-term projections can involve a lot of mathematics, and short-term projections can be very deceiving. For example, in a single day, values can fluctuate radically, causing nervousness in people who are inexperienced, but over the course of a week, values may remain relatively static when averaged. Subtle cues in financial charts can be very revealing, for those who know how to look for them, with descending tops being a more obvious example of a financial trend.