You are out with your friends in a pub and what is the one expected thing that every group is bound to do during their time there? A bottoms-up! A party is not a party without a bottoms-up competition, and it makes you 'high' faster than any other way.
Stock markets also have a similar pattern. Do you want an expected rise in price? Look for double bottoms in the chart. This blog discussing a strong trend reversal pattern that most analysts rely on.
Double Top
A double top chart pattern is indicative of a forthcoming bearish market. The name itself suggests that the chart pattern consists of two highs (tops) after which reversal candlestick patterns are observed. This chart forms a pattern indicating the letter 'M'. The two highs and the neckline are important levels in a double top chart pattern. Following is the example of a double top chart pattern:
Previous Trend: There must an existing upward trend before the double top pattern surfaces.
First Peak: The first peak is marked by a major high in the current trend after which we may see a correction.
Trough: After the first peak, there is a correction in the stock which brings the prices down to a certain level depending on various Fibonacci levels. The trough is also known as the "Neckline".
Second Peak: After witnessing a reversal from the trough made according to the Fibo levels, the stock prices reach the major high that we saw at the first peak. The second peak would be near the levels of resistance formed by the first peak. Exact peaks are appreciated but there is always some leeway.
If all the above conditions are met, then only there is a possibility of formation of a double top chart pattern. However, confirmation has to be awaited before making any trade decision.
The decline from peak: The double top trend reversal not complete until the price goes past the support formed by the neckline. This breakdown should, as usual, be supported with high or decent volumes to continue the reversal trends. After the support is breached it becomes a significant resistance.
Price Target: The next price target is the difference between the price at peak and the price at the neckline.
Psychology: The stock tried to test and retest a particular level (peaks) two times, however, it could not sustain those levels, breaking the confidence of the investors. When the support at the neckline is broken, the bears absorb the bulls leading to the formation of a downward trend.
Note: Until the support at the neckline is broken in a convincing manner you should not take any actions since the stock may eventually rise up.
An example from the market
Double Bottom
The Double bottom chart pattern is an exact inversion of the chart pattern described above. It indicates forthcoming bull psychology for the stock. This pattern forms two bottoms after a long downward trend to reverse into a rising trend. This pattern forms the letter 'W' with its candlesticks. The two lows and the inverted neckline are important levels for this chart pattern
Following is the example of a double bottom chart pattern
Previous trend: The stock should follow a downward trend before witnessing the double bottom chart pattern.
First Trough: Since it is an inverted version of the double top pattern, the major lows or troughs in the existing trends are taken into consideration. That low (1) becomes the strong support level for the stock.
Peak: After the first trough the stock shows a reversal or correction to reach a peak level also known as the neckline.
Second Trough: In the pattern, the price falls back after the peak to reach the level of the first trough. The second trough is made almost exactly at the price levels of the first trough creating a major support level. After this, a reversal is expected from the stock.
Advance from the Trough: Gain in the volumes are of high importance in the double bottom chart pattern to receive a reversal confirmation. A 'gap up' in this case after the second trough is considered a good indication of a sustained trend reversal. As usual, one should wait for the stock to break the resistance formed by the neckline for a successful double bottom pattern.
Price Target: The expected price hike is the difference between the price at the neckline and the trough.
Psychology: The prices try to fall back twice reaching the troughs, however, could not sustain past that. This changes the sentiments in the market and increases the expectations of the investors. Once the stock breaks the resistance at the neckline, the bulls absorb the bear and an upward trend is established.
An example from the market
Triple Top and Triple Bottom Charts
Extending the pattern on double top and bottom charts, triple top and bottom charts also trigger a reversal in the trend. These charts have an extra peak or a trough before reversing the existing trend.
These are some self-explanatory images:
Triple Top
Triple Bottom
Stay tuned for more such blogs on technical analysis!
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