Starting with a rally to new highs, Double Top will then experience a slight pullback before a second rally tests the previous highs. Soon enough, sellers will completely overwhelm the buyers which results in a collapse in pricing. After weeks of recovery, the stock will eventually test the previous support level. Although there are many different variations of this pattern, the regular pattern will see an intermediate and maybe even a long-term change from bullish to bearish. Until the key support has been broken, the reversal has no way of being confirmed even after many potential patterns form over time.
By subtracting the difference between the highest high and the reaction low seen at the breakout level, you can find the technical target. The reaction low seen after the second top is the breakout level and no pattern will be considered complete until the stock eventually falls beneath this level. Until this moment, it is still a potential pattern.
In terms of time difference, the peaks are normally separated by four or five weeks; it could be considered a normal resistance if the peaks are too close together. Also, the lows in between peaks need to fall each time and around 10% is considered adequate. If any declines are less than 10%, there may not be enough of an increase when it comes to selling pressure. Also, there could be a problem with a lack of demand and this will keep the pattern in a low phase for an extended period of time. If you want signs that the demand is weakening, look for contraction even after the security advances.
Unfortunately, too many people jump too early but you should always wait for the support to be broken convincingly. If you need further support, the volume should also expand. By using these markers, you should be able to avoid losing out to potential false breakouts.
Previous Trend - Just like with all other reversal patterns, there needs to be a prior trend. For a double top pattern to exist, there needs to have been numerous months of an upwards trend.
First High - With the first peak, this should be the highest high. At this point in time, the uptrend isn't questioned at all because it doesn’t come out of the blue.
Dip - With the decline that follows, the volume doesn’t normally play a huge role and the decline will generally range from 10-20%. When demand weakens, this period can be drawn out.
Second High - With this high, it is expected that there will be resistance from the previous high and even after reaching this point, it is still only a potential double top that is occurring. Although it is becoming more and more likely as time goes on, there still needs to be confirmation. Between peaks, there would normally be a few weeks with the average coming out at 2-3 months. Many prefer to deal with exact peaks but there is a little leeway - this is thought to be around 3%.
Decline - As the decline occurs, the volume should expand and the descent will be accelerated. At this point, it shows that supply is stronger than demand and a test of support is just around the corner.
Support Break - The pattern still isn't complete after trading down to support; the pattern will only be completed once the lowest point between the peaks has been broken.
Turned Resistance - Sometimes, there will be a test in the form of a reaction rally as the broken support becomes potential resistance. In this test, it can often give a second chance to initiate a short or exit a long-term position.
Price Target - By taking the support break and subtracting the distance between the support break and the peak, you can find the price target. Therefore, there will be a bigger decline as the formation grows bigger.