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Originally Posted by AMITBE
Two technical analysis terms that come up often are Double Top and Double Bottom.
I am making some notes here on the dynamics of these, to widen our understanding of a most vital and recurrent theme that appears in almost all charts I have come across. An understanding of these would help in determining a crucially decisive phase in the long or short term trend in the progress of price movement of a scrip.
The Double Top and Double Bottom formations are invariably the true harbingers of an oncoming trend reversal. They are the fulcrum points where an extended up or down trend, or even a short term up or down trend, is about to turn direction.
The Double Top pattern as the term implies, is the formation of two successive peaks that are roughly equal in height, with a mild valley in between. There may be variations, but the typical Double Top marks either a short term or long term change, in the movement of a trend from bullish to bearish.
Assuming the existence of a long or short up-trend, the first peak would mark the highest point of the trend. As such, the peak in itself is a normal occurrence and there is no threat to the up-trend as yet.
At the culmination of the first peak, a decline takes place that would usually drop to a point about 20% from where the peak had started building up. The decline or increase in volume during this pullback has no real significance. The bottom of this decline is normally extended sideway slightly, to give a ‘u’ shape to the trough being created.
Here begins the second climb and will normally occur with low volume. It then tests the level of the previous peak. At the confirmation of any resistance here, the possibility of a Double Top arises. This pattern now awaits further confirmation, as this resistance may well be just a resistance in the ongoing up trend.
The gap between the peaks may vary, depending on if it’s a long trend or a short one. It can be a few days, weeks, or months. Another norm with the twin peaks is the exactness in their heights. A slight variance is allowed usually.
The second decline coming off the second peak would be on increased volume, and increased velocity. This indicates that the supply far exceeds demand. Also, a fresh lot of short traders are attracted here, and the price begins to slip steeply. The level at the bottom, where the first peak/climb had begun, is now the crucial support point, and moving down towards it, the Double Top yet remains unconfirmed. Once this support is tested and convincingly violated, the pattern is complete. To extend this further, the newly broken support level would act as a resistance to any attempted upside again, and would normally not get breached as the demand is poor. Here is another opportunity to trade a short. With declining demand and increased supply, the price begins to spin downwards. More supports are broken, and now a bearish down trend is fully in place. The trend reversal has come to pass.
There could be false Double Tops too. The trend is always in force until proven otherwise. Until the key support is broken in a convincing manner with expanded volume, the up trend will remain intact.
A Double Bottom, the formation of which signifies a trend reversal from bearish to bullish, is in terms of its dynamics, an exact inversion of a Double Top.
I’m sure the explanation above of the Double Top is clear to understand, in order to conceptualise the workings of a Double Bottom.
Should any member feel interested in a similar explanation of the Double Bottom for clarity, I’d be happy to do it.
So much for now.
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16th September 2005, 03:00 PM
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