Chart Topping Patterns to Avoid: Double Top

The Double Top pattern is the reverse of a Double Bottom and looks like an upside down "W" or "M" shape. If the second top is being made on lower volume watch out as this maybe a sign a big sell-off is coming. Some examples are shown below.

double top

After KIDE made its first top around $90 in late October it pulled back to around $70 by early November. It then rose back to $90 by mid-November and made a second top (Double Top) on lower volume (point A) before selling off on increasing volume. As you can see KIDE went from $90 to $40 in less than three weeks. If you had a position in this stock and didn’t get out at the first top then you would have had a second opportunity to sell at the second top. Hopefully as an investor you will recognize this pattern and not buy a stock making a second top especially if its on lower volume.

stock chart pattern to avoid

Even the big stocks will show similar patterns as this chart of IBM shows. IBM made the first top in mid-July and then pulled back to around $120. It then rallied back up to its previous high of $140 in mid-September (Double Top) but couldn’t sustain its momentum and sold-off sharply the next several weeks ($140 to $90). Although it’s hard to see, the second top made by IBM in mid-September was on lower volume.

Regards,

May 2004
by Bob Kleyla
http://www.amateur-investor.net/