Stock Chart: Double Tops and Bottoms

A much more common reversal pattern is the double top or bottom. Next to the head and shoulders, it is the most frequently seen and the most easily recognized.

 

Example of a bouble top. This pattern has two peaks (A and C) at about the same level. The pattern is complete when the middle trough at point B is broken on a closing basis. Volume is usually lighter on the second peak (C) and picks up on the breakdown (D), A return move bakc to the lower line is not unusual. The minimum measuring target is the height of the top projected downward from the breakdown poiht.

Example of a double bottom. A morror image of the double top. Volume is more important on the upside breakout. Return moves back to the breakout are more common at bottoms.

The top is often referred to as an “M” and the bottom as a “W”. As in most other areas of market analysis, real-life examples are usually some variation of the ideal. for one thing, sometimes the two peaks are not at exactly the same price level. On occasion, the second peak will not quite reach the level of the first peak, which is not too problematical. What does cause some problems is when The second peak acutally exceeds the first peak by a slight margin. what at first may appear to be a valid upside breakout and resumption of the uptrend may turn out to be part of the topping process.

The terms “double top and bottom” are greatly overused in the financial markets. Most potential double tops or bottoms wind up being something else.The reason for this is that prices have a strong tendency to back off from a previous peak or bounce off a previous low.These price changes are a natural reaction and do not in themselves constitute a reversal pattern. At a top, prices must actually violate the previous reaction low before the double top exists.

The size of the pattern is always important. The longer the time period between the two peaks and the greater the height of the pattern, the greater the potential impending reversal. Most valid double tops or bottoms should have at least a month between the two peaks or troughs.

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