A double top happens when the price of an asset goes up twice in a row, with only a small drop i...
A double top happens when the price of an asset goes up twice in a row, with only a small drop in price in between.
This is a very bad reversal pattern on a technical level. Double peaks happen a lot in the financial markets.
It is confirmed when the price of the asset drops below a support level that is equal to the low between the two previous highs.
When a double top shows up, it could mean that the medium to long-term trend of an asset class is about to change.
The chart above shows the double top pattern seen in Amazon.com, Inc. (AMZN) stock between September and October of 2018 around a price of $2,050. In this case, there was a huge amount of support, around $1,880.
Even though the stock fell about 8% from its high point in October to the support level of $1,880, the double top could not be proven until the stock fell below $1,880.
After that, the price of the shares kept going down until it was about 31% less than before. 1
In the next picture, we'll use Netflix Inc. (NFLX), and it looks like a double top was built between March and April of 2018.
In contrast, we can see that support hasn't been broken and hasn't even been tested in this case, as the stock price keeps going up in an uptrend.
But if you look at the chart and scroll down, you can see that the stock seems to make what looks like a double top in June and July.
This time, however, the pattern turns out to be a reversal, as shown by the price falling below the support level of $380.
This led to a 39% loss in December when the price fell to $231, which was 39% below the support level.
Take note of how the $380 support level stopped the stock from going up on two separate occasions in November.
In fact, there is an important difference to be made between a double top and a failed attempt. A real double top is a very bad technical pattern that can cause the price of a stock or asset to drop by a lot.
This kind of wear and tear can be very harmful. But to be sure that a double top is real, you need to be patient and know where the critical support level is.
If you only look at two consecutive peaks to determine a double top, you might get a wrong reading, which could cause you to get out of a position too soon.
Once the proper identification has been made, double top formations are extremely lucrative in the financial markets.
Nevertheless, they have the potential to cause a significant amount of damage if they are perceived in a wrong manner.
As a consequence of this, one needs to exercise utmost caution and patience before drawing any conclusions.
