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Right now we're going to take a look at the double top reversal pattern.
We're going into some technical analysis basics and share with you the double top reversal pattern.
What Does It Look Like?
This is the first thing you might want to know. It looks like something like this. We create a two peak system. We have our resistance level and our first and second swing points on it.
You'll also get this supporting level here under the stock as well. We have two swing points that create a double top.
Where is the strength and where is the weakness is what you're looking for in these patterns?
With this pattern, you have the initial trend - to the upside. What happens is that as we move to the upside with the stock price, you don't have enough buyers. That weakness comes in, and people start selling or taking profits. Then more people come back in and then it goes into the second top.
People think it might be a good value and they'll go back in and buy some shares. And that's what happens - not enough people come in. When not enough people come in it reverses, and that's why you get that second top. You get the double top, and then stock comes back down.
From time to time it may test these levels here and get some little bounces here and then roll back over.
Then eventually you'll see it roll further over into lower prices. And that's why it's known as the reversal pattern. Some things to watch for as you're looking at this is that you want the volume to pick up on the selling movements. That's where the trend or the pattern confirms itself a little more.
Anytime you're getting these selling off movements (pink lines), you'd like to see a little bit of higher volume in that spot. Especially as you get into the break, and if you're looking to enter on that position one of the entry points could be just after it breaks that support.
That could be your initial entry point if you're shorting the stock. Sometimes what also will happen is after this break you might get a retest of that support level. That support level is now resistance. As you retest that level, you'll get that rejection.
If you missed that earlier entry opportunity, you could get a second entry opportunity right after. That could give you another opportunity to short the stock. If you're looking to buy on value, this is a little bit difficult to do with this pattern. That's because you're looking for it to go much lower in price and then give it some room and time.
How Long Does It Take for This Pattern to Evolve?
Sometimes it could happen in two to three weeks. Other times I would say more or less four to six to eight weeks. That is more common in the stock market world.
If you're looking for a two-month time span that's more healthy. Or even one month around there.
How Far This Pattern Could Go?
If you're looking for the distance of how far this pattern could go or the projected move, this is what to do. Take the peak right over here; draw a line down to the support level that you have over at this point where we hit the support and bounce. And that gives you a distance. Take that distance and move it right at that break and go again right there.
That way your projected move is right at that same amount. And that gives you an indication. Sometimes these things could go a little bit lower. Sometimes they're a little bit shorter.
It just depends on something else. But that's a rough area. Because it's the number of buyers and sellers that are over at this level will probably be around that level. And that's why you can't be that precise because that may change and some people may get in it earlier some people may get in it later.
Some of the Issues That Can Happen
Sometimes it evolves into a triple top. If you look at another pattern here, you could get a triple top in this pattern as well.
You could get four tops. This may even break out to the upside. Instead of bouncing and rolling over you may get this distribution and consolidation for sideways. That way this pattern could slowly start moving to the upside. Eventually, jump higher.
When you see two points where the stock is rejecting it doesn't mean all of a sudden it's a double top. What you're looking for is this - the volume picking up to this selling side and the selling pressure. That could give you an indication that there's more selling pressure that's coming in.
That could mean that with more selling pressure you could get this thing to roll over even further. That's what you're watching for. In some situations, it does have a double top, but they actually will continue. That's because you get enough consolidation and more buyers will step in because of the digestion, and it goes higher.
Your whole point behind this pattern is to recognize two peaks. That means there's resistance and that says this is a little bit of a difficult level to break through.
And if that's a difficult level to break through and if we continue moving lower and we break below that support level that could be a longer-term downtrend. That can be a place where I may want to hold off on the stock.
On the other approach is if you're looking for a bullish movement. You could wait for that to break out - that resistance level. And this could be a bullish or a buy area up there. That could happen from time to time as you recognize the whole situation with two peaks.
Just because it's a double top doesn't mean it's going to move higher or lower. But it will be classified as that pattern double top reversal once it starts moving into the other direction that it came from. The whole point behind the patterns is to name the chart movement and way to reference one thing or another in our discussions easily.
Otherwise, as you look at the stock, your primary goal is to decide if that stock is going higher or lower. And what you're looking for is where is the weakness which you can get and understand from the volume. Is it selling off on huge volume or weak volume? If it was weak volume, you might see it digest and move higher.
Example of Double Top Reversal Pattern - Groupon
Let's take a look on screen at this double top reversal pattern. We're taking a look at Groupon.
You can see from the stock we first sold off around 2012. Then finally we're trying to move higher into higher prices in 2013. We didn't do so well, and you can see that around August, September, and November time we've created two peaks.
At those two peaks, we have a little bit of resistance, and this is our double top. If you look at our support level, we have slight support that gets retested individually at this swing point at lower prices right around $9. Our high range is just right above $12, and we're moving into from $9 to $12 range.
The stock broke through and then came back up to retest that $9 range. And then it continued moving lower. You'll also notice the volume how big and accelerated it was on that break.
It did pick up. Initially when we were digesting the volume did decline just a little bit. And then we picked up in a big way after that at least with one bar. And then slowly with a few surges in prices or surge bars later on in the bearish sense.
That's our double top right there. As far as our distance goes, you can see the distance from here to here, and then you take that, and you can see the projection will go there.
Groupon ended up going much lower than that. But as far as that pattern goes it's you should expect a little bit lower, but it didn't work out in this case.
Example of Double Top - TRIPADVISOR
Here we're going in from lower prices to higher prices. We get to a specific peak. Stock, as you can see, was very extended at that time. It just moved too far and too fast. You created one peak there, and we'll draw a line across, and you can see we created a second peak a little later.
Once we digested this move moving sideways when we got into the second peak again there was just not enough volume. Notice that volume was declining. We almost created a bowl-shaped pattern, and then we started to pick up the volume.
But it was the bearish volume. That's what created and made the stock roll over. You're shorting opportunity. It didn't last too long because we got positive news and insights shortly after. But then with the time that stock eventually creates another double top that rolled back. That created further lower prices.
As you can see sometimes, they only work for a short period. That's the case because you get more news and hype and then, later on, you'll get that further rollover. That happens with many patterns in general. It's not that they all work out perfectly just to show you what could happen.
Triple Top Example
Let me show you a triple top example. You can even get a quadruple top. Here is our example of STX. We're looking at the year 2006, 2007, 2008. You can see the stock had a tough time breaking above the 27.5 range.
We created a triple top between those few years. Because it was not sustainable and it didn't have enough energy that stock rolled over. Finally, there's your break so your entry point would be right around this point which would be about $18.
That stock continued into about a $3 range. Think of that massive sell-off that happened there. Anyways that's a triple top very similar to a double top. You can see it was moving to the upside for a short time. We did get acceleration in 2003 (very steep), so that's why it came back down as we continue to move into higher prices.
We got that triple top and eventually that stock broke lower because it couldn't break through to higher prices. And that's what happened. Then finally climbed to further higher prices or back in the triple top area.
I hope this pattern was helpful for you to learning and understanding the double top and maybe even a little bit of the triple top. And if you like this video and you want to see more great videos like this then go ahead and subscribe to our newsletter list.