Double Top

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What is It ?

This pattern can happen on any time frame………this halts the uptrend and starts a downtrend in that stock or index.

  • Also called as M Top,coz it resembles an "M".
  • If double tops are bearish,triple tops are even more so.
  • Volume is higher on the first peak,and lesser inthe 2nd peak,and starts picking up on breakdown from the 2nd peak.
  • There has to be a distance between one top and the other to qualify as a Double Top. Needs at least 3 month difference if you are looking athe daily charts.
  • Now take the trough between the two peaks…….breaking that level is confirmation of a change in trend to the downside.

So,summarising, let us say we are looking at the daily charts of any stock.We need to have a top put in,let us say January,and then another top at the same area,let us say in April.The rally to the first top came in good volumes,and then a pullback on low volumes.The rally to the second top came in relatively low volumes and then the declines coming in relatively stronger volume.It may be a double top,but you cannot call it one till the trough between the two tops is taken out.Then we can call it a double top.Also called as M-TOP.

How does knowing this help us in our trading?

We have a great uptrend on good volume and a pullback on lesser volumes…..so far so good.Now the 2nd peak formation starts to form with much lesser volume as compared to the 1st peak,and then a breakdown on high volume……..this gives us an indication to exit our longs if we are short term players as trendlines get broken to the downside.But without confirmation,we are officially in nothing more than a sideways trend with possible fall downwards.Now the trough gets broken and usually the stock retraces back……..We are now officially in a downtrend.The time to short has arrived.Short a half at the retracement,and short the other half below the low of the bar that closed below the trough line.

Target

The distance between the peak of the "M" to the trough of the "M"……add that to the low of the bar that broke the trough line.That's our target point.

Remember

Every time,price hits the same area does not make it a Double Top…….it could very well be just some sideways consolidation before newer highs are made……or a triangle in formation.Wait for the support to break before calling it a Double Top.
The longer the period between the peaks and the greater the height,expect the reversal to be greater.

Example

doubletopreversal.png

Reference

StockCharts


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