The chart below illustrates the Double Top reversal pattern:
Double Top Formation Components
First High: Bulls push prices upwards making new highs; however, these new highs are short lived and prices retreat.
Second High: Prices don’t retreat for long because bulls make another run, making a similar high. Nevertheless, this is bearish, because bulls were unable to push prices higher; bears held their ground at the previous high level. The bears push prices back to support (Confirmation line); this is a pivotal moment – either bulls will make another push higher or bears will take control and push prices even lower, more than likely taking over for good.
Double Top Sell Signal
Sell when price closes below the confirmation line.
Note that traders expect a significant increase in volume to accompany the confirmation line break; if there is very little volume when price pierces the confirmation line, then the move downward is suspect. Small volume usually means weak support of price movement (see: Volume).
Another similar chart pattern is the Head & Shoulders Pattern (see: Head & Shoulders). The opposite of the Double Top is the bullish Double Bottom (see: Double Bottom).
