Chart Patterns: Double Tops and Bottoms

Double tops and bottoms are among the most common and reliable reversal patterns. They're easier to spot than head and shoulders and occur frequently. [DEFINITION] Double Top: A bearish reversal pattern where price reaches a high twice at approximately the same level, with a moderate decline between, before reversing lower. [DEFINITION] Double Bottom: A bullish reversal pattern where price reaches a low twice at approximately the same level, with a moderate rally between, before reversing higher. ### Double Top Anatomy 1. **First Peak:** Price reaches a high during uptrend 2. **Pullback:** Price declines moderately (typically 10-20%) 3. **Second Peak:** Price rallies back to first peak level but fails 4. **Breakdown:** Price falls below the middle trough [EXAMPLE] Stock rises to $100, pulls back to $90, rallies to $99 (can't break $100), then drops below $90. This confirms a double top with a target around $80. ### Trading Double Tops **Entry:** Short when price breaks below the middle trough **Stop-loss:** Above the peaks **Target:** Height of pattern subtracted from breakdown point [FORMULA] Target = Breakdown Level - (Peak - Trough) [TIP] The second peak doesn't need to be exactly at the first peak level. Within 3% is typically acceptable. The key is that buyers couldn't push to new highs. ### Double Bottom (Bullish) The mirror image of a double top: 1. First trough forms during downtrend 2. Price rallies moderately 3. Price falls back to first trough level but holds 4. Price breaks above middle peak—pattern complete [EXAMPLE] Stock falls to $50, bounces to $60, falls back to $51, then rallies above $60. Bullish pattern complete with target around $70. ### Volume Considerations **Ideal volume pattern for double bottom:** - High volume on first trough - Lower volume on second trough - High volume on breakout [KEY] The second test on lower volume suggests selling pressure is exhausted—a bullish sign for double bottoms. ### Failed Patterns [WARNING] Double tops can fail if price breaks above both peaks. This creates a continuation pattern and often leads to accelerated upside. Always use stop-losses. Failed double bottom = accelerated downside ### Time Between Peaks/Troughs Patterns taking 3-6 weeks are ideal. Too quick (days) may just be noise. Too long (months) may be a trading range rather than a reversal pattern. [EXERCISE] A stock forms what looks like a double bottom at $40 (first low) and $42 (second low), with a peak at $50 between them. Price breaks above $50. Calculate the target. |ANSWER| Pattern height = $50 - $40 = $10. Target = $50 + $10 = $60. The measured move projects the pattern's height above the breakout point. [SCENARIO] You're watching a stock that formed a double top three months ago at $100. It broke down, reached the target, and now it's rallying back toward $100. If price reaches $100 again, what level becomes critical? $100 is now major resistance (former double top level). If price breaks above $100 with volume, it invalidates the bearish pattern and could signal a major bullish move. If it fails again at $100, it could form a "triple top"—even more bearish.