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Technical Indicator: Double Tops

It’s been a while since I wrote about a technical indicator (the last time it was about Relative Strength Indicator [3] back in May) but this one I was reading about, Double Tops, caught my eye because it looks very similar, at least superficially, to another indictor – Cup and Handle [4].

As a recap, the Cup and Handle is a breakout positive indicator that says that if the pattern look like a cup with a handle, then it’s poised to break out. Reading the other post and seeing the graphic will go a long way so check it out and I’ll still be here when you come back. 🙂

So, how does Double Tops work? First off, Double Tops is a negative indicator and will indicate when you can expect an extended uptrend to turn into a downtrend.

Image from Investopedia [5]

So, don’t a ton of stocks show this behavior but not trend downward? There are a few characteristics to this trend that you must pay careful attention to in order to identify this indicator. First, the two tops have to stop at levels of resistance. After the first top, you should see something of a 10-20% fall off before pushing back upward to hit the second top. Now, at this point you should see an increase in volume as it starts to decline from the second top. This is still not a double top until it breaks through the lowest point of the “trough” between the two tops. There are a few other caveats and I invite you to read this great article [6] for more information as well as an example involving Ford.

This is a reversal trend so you can expect the same sort of rules from its sister indicator, Double Bottoms, which would indicate a falling stock will turn into a rising stock.