Chart patterns are a vital part of technical analysis, helping traders anticipate potential reversals or continuations in price. One of the most commonly observed reversal patterns is the Double Top. Recognizing this pattern early can help traders avoid long positions near market tops and prepare for potential downward moves.
A Double Top is a bearish reversal pattern that looks like the letter “M.” It typically forms after an extended uptrend, signalling that buying pressure is weakening and a potential trend reversal to the downside may occur.
Anatomy of the Double Top Pattern
First Peak: The pattern begins with a strong upward move that reaches a high (the first peak) before pulling back. This initial peak marks a level of resistance where sellers begin to emerge.
Second Peak: After the pullback, buyers attempt to push prices higher again, but the rally stalls near the level of the first peak, creating a second top. This second failure to break above resistance shows diminishing bullish strength.
Neckline and Breakdown: The low point between the two peaks is known as the neckline. A breakdown occurs when the price closes below this neckline on increased volume, confirming the Double Top pattern and indicating a potential reversal from bullish to bearish trend.
How to Trade the Double Top Pattern
Entry Point
- Enter a short position when the price breaks and closes below the neckline with significant volume.
- A more conservative approach is to wait for a retest of the neckline after the breakdown, entering when the retest fails to push the price back above it.
- Partial entry can also be used: 50% on the initial breakdown and 50% after a failed retest.
Target Price: Two main techniques are commonly used to estimate the price target:
Chart-Based Target:
- Measure the height from the peaks to the neckline.
- Subtract this distance from the neckline to project the target level.
- Target = Neckline – (Top – Neckline)
Fibonacci Extension or Pivot Points: These tools can also be used to estimate logical support levels or profit-taking zones above the breakout.
Stop-Loss Placement
- Place the stop-loss just above the second peak to protect against failed breakdowns.
- Alternatively, a tighter stop can be placed just above the neckline if you entered on a retest.
- Avoid overly tight stops in volatile markets as minor pullbacks can trigger premature exits.
Additional Tips
- Double Top patterns are more effective after a sustained uptrend — they lose significance in choppy or sideways markets.
- Volume should typically increase on the breakdown and decrease during the formation of the second peak.
- Use additional indicators like RSI divergence (lower highs on RSI vs. higher highs on price) or MACD bearish crossovers to confirm weakness.
- Look for a rounded or flat second top rather than a sharp spike — this shows sellers consistently rejecting higher prices.
Charting Exercise: Switch to a weekly chart and scan for potential Double Top formations. Clearly mark:
- First and second peaks
- Neckline (support zone between the two tops)
- Entry point (breakdown candle)
- Target and Stop-loss levels
Use charting tools to draw horizontal lines for the peaks and neckline. Measure the distance from peak to neckline to project a conservative target after breakdown. Confirm with volume analysis to validate the setup.
Homework: Study the following stocks and check if a Double Top pattern is forming or has already played out:
1. Bharti Airtel Ltd. (BHARTIARTL)
2. Syngene International Ltd. (SYNGENE)
You may also add the stock to your watch list to understand further price action.
Disclaimer: This analysis is purely for educational purpose and does not contain any recommendation. Please consult your financial advisor before taking any financial decision.
