Double Top Chart Pattern
Double top is a trend reversal chart pattern formed after prolonged uptrend Let’s look at picture shown below, At point A, the uptrend is proceeding as expected with no signs of a top and takes corrective dip to point B, Then market rallies again to point C, and isn’t able to reach the top of the previous peak at point A. To continue an uptrend, each high point must exceed the high point of the rally preceding it. The failure of the rally at point C to reach the previous peak at point C fulfils half of the requirement for equal peaks.
By this time, the major up trend line (1) has already been broken, usually at point B, constituting another danger signal but, despite all of these warnings, all that we know at this point is that the trend has shifted from up to sideways. This might be sufficient cause to liquidate long positions but not necessarily enough to justify new short sales By this time, a flatter trend line (2) can be drawn under the last reaction lows, which is called a neckline. This line generally has a slight upward slope at tops (although its sometimes horizontal and less often, tilts downward, The market has now violated the trend line (2) along the bottom of points B, completed the requirement to, a new downtrend-descending troughs The new downtrend is now identified by the declining highs and lows at points C, D, and E.
It is very fairly common to see a pullback near to neck line after formation of the pattern. It should generally be seen as a healthy thing as it gives better confirmation of neckline as resistance. In some case the pull back may happen few times. If this happens too many times then it may not be typical double top pattern. In case of pullback it is recommended to keep a stop loss of about 3% above neckline.
Volume in double Top has a lot of significance as it can help to confirm formation of the pattern. Volume during first top should generally be much higher than volume during second top formation and volume during midpoint formation should be much lower than volume during neckline break out Please avoid aggressive positioning when volume is not supporting the move. For aggressive traders a strict stop loss is recommended.