A double top is a reversal pattern that is formed after there is an extended move up, there must be an uptrend in place before we can even talk of a double topforming on the chart.
A Double Top formation is a common chart pattern that occurs. This chart pattern is one of the easier ones to understand but many times over looked. The “tops” are peaks which are formed when the price hits a certain level that can’t be broken.
Double Top formation is a distinct chart pattern characterized by a rally to a new high, then decline to a support level before embarking on another rally to the second peak. Price rallies to make the second peak (top) but sellers overwhelm buyers and the price collapses. As the price is unable to surpass the previous high(see also triple top) , it will retreat lower, and once the price breaks the support from the first decline, we will have a break of the support from first decline, we will have a break of the support line. Once the support line is broken, we will have a confirmed double top pattern.
The technical target for double tops is derived by subtracting the point difference between the top and the reaction low from the breakout level. After the second top has been created, the breakout level is the reaction low. No double top formation is complete until the stock falls through this level.
The double bottom is also a trend reversal formation. This formation occur after extended downtrends when two valleys or “bottoms” have been formed.
Double Bottom formation is in many ways the mirror image of the Double Top.