Chart Pattern - Double Top (Reversal)

Double Top (Reversal)

The double top is a major reversal pattern that forms after an extended uptrend. As its name implies, the pattern is made up of two consecutive peaks that are roughly equal, with a moderate trough in-between

The double top in Ford took about 5 months to form. Even after the support break, there was another test of newfound resistance almost 4 months later.

1. From a low near 10 in Mar-97, Ford advanced to 36 by Dec-98. The trend line extending up from Mar-97 is an internal trend line and Ford held above it until the break in May-99.
2. From the first peak, the stock declined around 15% to form the trough.
3. After reaching a low near 30 1/2 in early February, the trough formed over the next 2 months, and there wasn't a rally until early April. This long-drawn-out low suggested tepid demand.
4. The decline from 36.80 occurred with two gaps down and increased volume. Furthermore, Chaikin Money Flow promptly moved below -10%. The speed with which money flows deteriorated indicated a serious increase in selling pressure.
5. In late May and early June, the stock traded for about 3 weeks at support from the previous low. During this time, money flows declined below -20%. Even though the situation looked ominous, the double formation would not be complete until support was broken.
6. Support was broken in early June when the stock fell below 28 1/2, which was more than 3% below support at 30 1/2. After this sharp drop, there was an equally sharp advance back above the newfound resistance level. While a test of broken support can be expected, it is usually not quite this early. The advance to 32 in late June may have triggered some unpleasant short covering for those who jumped in on the first support break. The stock fell to 25, and then began the retracement advance that would ultimately test support.

On the second chart, 30 3/4 marked the support turned resistance level, and 31 marked a 50% retracement of the decline from 36.80 to 25. Combined with the price action in early June and early July, a resistance zone could probably be established between 31 and 32. The stock subsequently formed a lower high at 30 in Jan-00, and declined to around 22 by mid-March.

Posted in: Chart Patterns,forex