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ANALYZING CHART PATTERNS: DOUBLE TOP

The double top and double bottom are another pair of well-known chart patterns whose names don't leave much to the imagination. These two reversal patterns illustrate a security's attempt to continue an existing trend. Upon several attempts to move higher, the trend is reversed and a new trend begins. These chart patterns formed will often resemble what looks like a "W" (for a double bottom) or an "M" (double top).

Double Top

The double-top pattern is found at the peaks of an upward trend and is a clear signal that the preceding upward trend is weakening and that buyers are losing interest. Upon completion of this pattern, the trend is considered to be reversed and the security is expected to move lower.

The first stage of this pattern is the creation of a new high during the upward trend, which, after peaking, faces resistance and sells off to a level of support. The next stage of this pattern will see the price start to move back towards the level of resistance found in the previous run-up, which again sells off back to the support level. The pattern is completed when the security falls below (or breaks down) the support level that had backstopped each move the security made, thus marking the beginnings of a downward trend.

Figure : Double-top pattern

It's important to note that the price does not need to touch the level of resistance but should be close to the prior peak. Also, when using this chart pattern one should wait for the price to break below the key level of support before entering. Trading before the signal is formed can yield disastrous results, as the pattern is only setting up the possibility for the trend reversal and could trade within this banded range for some time without falling through.

This pattern is a clear illustration of a battle between buyers and sellers. The buyers are attempting to push the security but are facing resistance, which prevents the continuation of the upward trend. After this goes on a couple of times, the buyers in the market start to give up or dry up, and the sellers start to take a stranglehold of the security, sending it down into a new downtrend.

Again, volume should be an important focus as one should look for an increase in volume when the security falls below the support level. Also, as in other chart patterns, do not be alarmed if there is a return to the previous support level that has now become a resistance level in the newly established trend.