Double tops look like the letter "M". A double top is formed when a new high is created (a peak) and is followed by a retracement downward; this middle part of the "M" is called the trough.
Middle Trough Relationship to Tops
Kirkpatrick & Dahlquist (2010) suggest that the trough be about 10% below the top of the tallest peak (p. 309). After the retracement, prices move higher once again to the level of the previous peak and from there, prices are rejected by this area of resistance.
Relationship of Right and Left Peak
Time Spacing between Peaks
According to Bulkowski (2005), the two high prices should be within 3-5% of one another and should be separated in time by 2 to 7 weeks; anything over 8 weeks and the success of the pattern begins to deteriorate; within a small variation, double tops tend to perform best when they occur within the top third of the yearly high price. Once prices penetrate below the price level established by the trough, then a sell signal is suggested.
Psychology of Double Top Chart Pattern
The psychology of the double top pattern is given next: The first peak of the pattern is just a continuation of the previous uptrend and is a new higher high. The trough of the double top is an expected consolidation after the higher high. However, trouble arises when prices move up from the trough and attempt to make yet another higher high for the uptrend. Traders have been able to push prices progressively higher thus far, but when prices fail to increase past the previous high, traders become worried. Once the low of the trough is penetrated, the uptrend is considered dead by traders. Prices were unable to make higher highs (making higher highs is one of the definitions of an uptrend) and now since the low of the trough (technically a low) has been broken below, now a new low has been created (making a lower low is one of the definitions of a downtrend). Now that the uptrend has been broken and a new downtrend has been created it is expected that traders will pile onto the new downtrend and prices will move lower.
When calculating price targets after the sell signal is suggested, Bulkowski (2008) promotes the following formula:
4 Double Top Chart Patterns
There are four anatomically suggestive double top patterns: Adam & Adam, Adam & Eve, Eve & Adam, and Eve & Eve. Topping price bars that are sharp "A"s, usually one day events, are referred to as "Adam"s. Whereas, rounded "n"s that are usually multiple day bottoming bars are referred to as "Eve"s.
Eve and Eve Double Top
The Eve and Eve (EE) double top formation occurs when there are two gently rolling over peaks "n". Bulkowski (2005) places the Eve and Eve double top pattern as the best of the four double top formations and an averaged maximum gain of 18%.
Adam and Adam Double Top
The Adam and Adam (AA) pattern has two consecutive sharp topped "A" points. According to Bulkowski (2005), the Adam and Adam double top is the second best performing double top pattern of the four and has an average lowest low of the decline after the breakout price (and before any retracement of over 20% upward) of 19%.
Adam and Adam Double Top Chart Example
The chart above of United Technologies (UTX) shows a double top after an uptrend. Each of the tops consists of a sharp one day price bar top. In this example, after prices fell below the trough's low price (blue line), a sell signal was given. Typically after the sell signal, prices rise back upward, called a pullback. Bulkowski's research points out that the AA double top pattern should pullback 61% of the time (2005). However, in the chart above of UTX, the prices did not pullback but continued falling down.
Adam and Eve Double Top
An Adam and Eve (AE) double top consists of the first peak being a sharp pointed top "A" and the second peak being soft and rounded top "n". Bulkowski (2005) considers the Adam and Eve double top to be a "poor performer" with an average maximum decline from the sell signal of 18%.
Eve and Adam Double Top
The Eve and Adam (EA) double top pattern is characterized by the first peak being a soft sloping multi-day topping pattern "n". The second peak is a sharp, usually one-day price bar "A". Bulkowski (2005) and his chart research shows the EA pattern has an averaged maximum gain of 15%.
Eve and Adam Double Top Chart Example
The Utilities SPDR ETF (XLU) chart above illustrates an Eve and Adam double top. After an uptrend, prices begin to flatten out and rollover over a ten day period. Prices fall dramatically on a large price bar and then begin upward once again creating the trough of the pattern and then peaking after a weeklong uptrend with a two day price bar spike higher creating the second high of the double top pattern. Once prices fall below the trough's lower price (the blue line) a sell signal is generated. The third day after the sell signal, there is a one day, relatively small retracement and then prices continue their fall downward.
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