Technical analysis II

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12. Double top

Double Tops appear on a chart in the shape of the letter "M" and are quite common.

A peak price is reached before a small decline, which causes the valley between the Double Tops, and then the price rallies again to a peak roughly equal to the level of the first. The price then falls away on a new downtrend.

A double top

Correctly predicting a Double Top can be tricky. This is because a simple uptrend, with each new wave of buying interspersed with minor reactions and profit taking, will appear as if it is making a Double Top formation. However, as you can see in the chart below, the data can progress in either direction.

The two pathways of a potential double top

Once you reach the point shown by the end of the line on the chart above, you cannot be sure if the Double Top formation will be confirmed and the price will drop away, or if the price will again rally and the uptrend will stay in force. In roughly 90% of cases you will find that the Double Top is, indeed, a fake and the uptrend will stay in force.

Volume is important in determining whether a true Double Top formation is being created or if it is going to be a fake. Look at the volumes associated with both of the peaks.

• If the volume associated with the first peak is greater than that associated with the second peak, this suggests that prices are unlikely to go higher - confirming the Double Top formation.
• If the volume accompanying the second rise is the same as that accompanying the first, or even greater, it is likely that the uptrend will continue.

The time span taken to create the Double Top formation can also help determine the likely progression of the price data.

• If the two tops are fairly close together in terms of time, it may well be a consolidation period, a pause for breath, before the rally continues.
• If the peaks are separated over a longer period and the valley between the two peaks is deep it is more likely to turn into a genuine Double Top.

1. Average share prices 2. Moving averages 3. Weighted moving averages 4. Where to plot moving averages 5. Interpreting moving averages - the basics 6. Classic interpretation of moving averages 7. Combining short and long term moving averages 8. Moving average convergence/divergence (MACD) 9. Reversal patterns 10. Head and shoulders top 11. Head and shoulders bottom 12. Double top 13. Double bottom 14. Rounding tops and bottoms 15. Broadening formations 16. Wedge formations 17. The momentum indicator 18. The momentum oscillator 19. Rate of change indicator 20. Price minus average 21. Relative strength indicator 22. Conclusion

• Martin Pring's Introduction to Technical Analysis
• Technical Analysis Plain and Simple
• Technical Analysis of the Financial Markets
• An Introduction to Technical Analysis - Reuters Financial Training Series