Double Top

What Is a Double Top?

A double top is a very bearish technical reversal pattern that forms after an asset arrives at a high price two sequential times with a moderate decline between the two highs. It is confirmed once the asset's price falls below a support level equal to the low between the two prior highs.

What Does A Double Top Tell You?

A double top signals a medium or long-term trend change in an asset class. The chart above is of Amazon.com Inc. (AMZN) and shows a double top pattern that framed in the stock among September and October 2018 around a price of $2,050. The important support level in this case conformed to $1,880. In spite of the stock falling almost 8% from October top to support at $1,880, one couldn't affirm the double top until after the stock fell below $1,880. From there on out the shares proceeded to plunge practically 31% further.

In the next model utilizing Netflix Inc. (NFLX), we can see what gives off an impression of being the formation of a double top in March and April 2018. Notwithstanding, in this case, we see that support is never broken or even tried as the stock keeps on rising along a uptrend. In any case, later in the chart one can see that the stock again forms what has all the earmarks of being a double top in June and July. However, this time it ends up being a reversal pattern, with the price falling below support at $380, bringing about a decline of 39% to $231 in December. Additionally, notice how the support level at $380 went about as resistance on two events in November when the stock was rising.

The Difference Between a Double Top and a Failed Double Top

There is without a doubt a huge difference between a double top and one that has failed. A real double top is a very bearish technical pattern which can lead to a very sharp decline in a stock or asset. Nonetheless, it is essential to be patient and distinguish the critical support level to affirm a double top's identity. Basing a double top exclusively on the formation of two sequential pinnacles could lead to a false perusing and cause an early exit from a position.

Limitations of Double Tops

Double top formations are highly effective when recognized accurately. In any case, they can be very adverse when they are deciphered mistakenly. Along these lines, one must be very careful and patient before rushing to make judgment calls.

Highlights

• It isn't as simple to spot as one would think since there should be a confirmation with a break below support.
• A double top is a bearish technical reversal pattern.