Double Top Pattern
Double top pattern is an bearish signal in technical analysis whereas double bottom is a bullish setup.
What are Double Tops and Bottoms?
A double top or bottom is another reversal pattern, which is common and easily recognized.
Double Top Pattern
* A prior uptrend sets a new high, usually on increased volume.
* Then, the stock price declines on a lighter volume.
* The price rallies again but is unable to pass the previous peak and falls again.
* If the price breaks support, declining below the previous low, a double top pattern has formed. (If the price does not break support, this might not be a reversal pattern since prices could just be in a consolidation phase, just before it resumes to its original uptrend.)
* After a double top pattern has formed, there is a possibility of a return move to the breakout point, but should not exceed it, before prices resume to the new downtrend.
Volume during a Double Top Pattern
In a double top pattern, there is usually heavier volume during the first peak and lighter volume on the second. However, when the price breaks support, signaling a reversal to a downtrend, it usually occurs on heavier volume.
Double Bottom Pattern
A double bottom pattern is a mirror image of the double top.
* A prior downtrend sets a new low, usually on higher volume.
* Then, the stock price rallies.
* The price declines again but is unable to fall under the previous low and bounces up again.
* If the price breaks resistance, rallying above the previous peak, a double bottom pattern has formed. (If the price does not break resistance, this might not be a reversal pattern since prices could just be in a consolidation phase, just before it resumes to its original downtrend.)
* After a double bottom pattern has formed, there is a possibility of a return move to the breakout point, but should not decline below it, before prices resume to the new uptrend.)
Volume during a Double Bottom Pattern
In a double bottom pattern, there is usually heavier volume during the first bottom and lighter volume on the second. However, when the price breaks resistance, signaling a reversal to an uptrend, it is important that it occurs on heavy volume.
Example of a Double Bottom Pattern:
Citigroup's stock just recently formed a double bottom at around $2.80 and rallied up over $4.40, which was yesterday's close. The stock is now trading at $4.70 so if you bought at the second bottom and sold it now, you would have made a 68% gain!
To learn more about stock chart patterns, check out Triple Tops and Bottoms.
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