A double top consists of two peaks formed in contact with resistance. This chartist pattern signals a probable reversal of an uptrend.
The Double Top, a bearish reversal figure
A chartist figure present in certain trend reversals, the Double Top is characterized by :
- The formation of an "M" on the price history (sometimes it forms a "MN", or "Triple Top")
- The existence of a previous uptrend and the reversal of this trend (which thus becomes bearish) after the Double Top
- The breaking of the "Neck Line" (term explained below).
Chronologically, the Double Top respects 7 key steps :
- Prior existence of an upward trend
- Formation of a first high point (sign of a confrontation between buyers and sellers)
- Reversal of the trend (which becomes bearish) up to the Neck Line, i.e. up to the low located between the two peaks of the Double Top
- Temporary resumption of the uptrend until the last high point reached (without managing to exceed this resistance level)
- Bearish recovery whose potential is then proportional to the initial upward trend (1)
- "Pullback to the Neck Line (buyers attempt to turn the trend up again)
- Two scenarios are then possible: either the pullback is successful and the chartist pattern becomes a Triple Top, or the pullback is unsuccessful, and the break of the Neck Line validates the Double Top pattern.
Depending on the case, the Double Top pattern allows for a wider or narrower gap between the two tops. The narrower the gap, the greater the probability of a downward reversal of the trend, and therefore of validation of the Double Top. Similarly, the peaks may take the form of a peak (Adam's peak) or, on the contrary, a rounded shape (Eve's peak).