Double Tops and Bottoms Price Patterns
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. For obvious reasons, the top is often
referred to as an "M" and the bottom as a "W." The
general characteristics of a double top are similar to
that of the head and shoulders and triple top except
that only two peaks appear instead of three. The volume
pattern is similar as is the measuring rule.
In
an uptrend, the market sets a new high,
usually on increased volume, and then declines on declining volume. So far, everything is proceeding
as expected in a normal uptrend. The next rally to
another peak, however, is unable to penetrate the previous peak at
A on a closing basis and begins to fall back again. A
potential double top has been set up. I use the word
"potential" because, as is the case with all reversal
patterns, the reversal is not complete until the
previous support point is violated on a closing
basis. Until that happens, prices could be in just a
sideways consolidation phase, preparing for a resumption
of the original uptrend.
The
ideal top has two prominent peaks at about the same
price level. Volume tends to be heavier during the
first peak and lighter on the second. A decisive
close under the middle trough on heavier
volume completes the pattern and signals a reversal
of trend to the downside. A return move to the
breakout point is not unusual prior to resumption of
the downtrend.
Measuring Technique for
the Double Top
The
measuring technique for the double top is the height of
the pattern projected from the breakdown point (the
point where the middle trough is broken). As
an alternative, measure the height of the first down leg
and project that length downward from
the middle trough. Measurements at the bottom
are the same, but in the other direction.
Double Tops and Bottoms Price
Patterns