Within the next five minutes I am going to show you how to make money trading one of the most powerful chart patterns in all of technical analysis…
The Double Top
While the market continues to zig, zag, and bounce around—it’s patterns like the double top that are proving to be reliable.
For those of you who don’t know what a double top is, it’s basically a chart pattern made up of two consecutive peaks that are roughly equal, with a moderate trough in-between.
In fact, some traders believe that the SPY is currently experiencing a double top.
Before we jump into whether or not the market has formed a double top, let’s learn what that even means.
There are some key elements to a double top reversal pattern.
It all starts with an uptrend… without it, there can’t be a reversal of course.
Next the stock peaks by hitting a high and pulling back to create a trough that is generally 10% or more from the peak.
Once the pullback has occurred, the stock will rise off the lows and create a second peak right around the same area as the first peak (within a few percent).
The two peaks are what will form the eventual “double top.”
But first we now need a decline from the second peak. This will generally have an increase of volume and/or an accelerated descent showing a shift in supply and demand.
Now here is the key… the double top reversal and trend reversal are still not complete until the stock price breaks support – the lowest point of the trough.
The break down through support (the trough low) will usually be on higher volume as it is a significant moment for the price and trend.
While a worded description is fine, it’s hard to visualize without a chart… so let’s look at a couple examples.
In the below chart of Amazon (AMZN), the stock formed a double top from Sept. – Oct. of 2018.
Let’s walk through the key elements…
- Decline (around 10% +) and creation of a trough
- Rise to create a second peak within a few percent of the first
- AND the pivotal break through the support level (the low of the trough) on elevated volume
And you will also notice that once it broke through the support, the support then became resistance… the stock price tested it before making another big wave down…
How do you trade the chart?
You wait for the break… always, always… wait for the break. Until it breaks, it isn’t confirmed and may go right back up into the uptrend.
Now look at Netflix (NFLX) – double top formed from June – July 2018
- Decline forming a trough
- Rise to a second peak near the first
- Decline from the second peak
- The ever so important break through the low of the trough on elevated volume.
And again… the stock price tested the previous support level (now resistance) before making a big move down.
How to trade a double top reversal and pull in those big gains
The most important aspect of trading a Double Top Reversal is to avoid jumping the gun.
You want confirmation of the pattern… so it has to break the low to finish the setup…
After that… we look to more technical analysis…
A straightforward trade is to sell below the trough low with a stop some level above it…
And the price target is simply calculated by taking the difference between the high of the peak and the low of the trough… and then simply subtract that from the low of the trough…
Another way to trade this setup if you want to add conviction to your trade… add other aspects of technical analysis…
In the AMZN chart after the break, it bounces back up and tests resistance at the break… giving you a great low risk entry on the failed test of resistance... from which it then breaks down and hits the target calculation and more…
In the NFLX chart, it breaks by opening in a big gap under the low… it then trades up to close above the break out point…
The trade setup happens the next day… you would be selling as it trades down through the break out point… from there, again, it easily make it to the target calculation.
No chart will be exactly the same… so the key is to add in other parts of technical analysis, like support and resistance, chart patterns, volume, indicators, and so forth… using these things will help you find a great trade setup once the stock breaks through support.
Back to the SPY… has it formed a double top reversal pattern?
There’s a simple answer to this… NO.
Why? Think about what you just learned?
The Double Top Reversal pattern is not complete without a break of the low from the trough…
So has the SPY formed a double top? NO.
Is it setting up? It could be, or it could just be trading in the range waiting for trade talks or one of another 5 things to get settled out…
So what do we know looking at the SPY chart below?
- Decline creating a trough
- Rise back to make a second peak
- It has not broken through the low of the trough SO it IS NOT a double top reversal pattern… as of yet.
So what can we do with this knowledge?
We are going to be patient… we have the beginnings of a setup… now we wait to see what happens next…
We are aware of the potential, and with that ready to trade if it happens…
I will be keeping a close eye on this as the market continues to deal with constantly changing headlines…
If you want to learn how to analyze charts and be able to confidently capture gains in any market condition… then consider working with me.
I’m known to collaborate closely with my clients and take special interest to ensure their growth and development as a trader.
Being a part of a team is the best way to learn and a smarter way to trade… getting started is easy… click the link below.