A Double Top is a bearish reversal pattern that appears on price charts and is commonly used in technical analysis. It signals that an asset’s price is likely to reverse from an uptrend to a downtrend. This pattern is identified by two consecutive peaks that reach roughly the same level, with a moderate trough in between them.
Key Characteristics of a Double Top:
- Formation:
- The pattern starts with an upward price movement, forming the first peak as buyers push the price higher.
- The price then falls to form a trough as sellers come in, but the asset does not continue downward and instead rises again.
- The second peak forms at a level similar to the first peak, but the price struggles to break higher, indicating resistance.
- Neckline:
- The line connecting the low points between the two peaks is called the neckline. The pattern is confirmed when the price breaks below this neckline after the second peak.
- Volume:
- Volume often decreases as the price rises to form the second peak, indicating weakening buying pressure. When the neckline is broken, the volume typically increases, confirming the reversal.
- Implications:
- Once the price breaks below the neckline, the Double Top pattern suggests a potential downward movement. Traders might look for short-selling opportunities or exit long positions when this pattern is confirmed.
Example:
If a stock price rises to \$100, falls to \$90, rises again to \$100, and then drops below \$90, this would form a Double Top pattern. The break below \$90 confirms the bearish reversal, suggesting the stock might continue to decline.
Reliability:
- The Double Top is considered a reliable reversal pattern, but like all technical indicators, it is not infallible. It is often used in conjunction with other indicators or patterns to improve the accuracy of predictions.
