Reversal Patterns 1 : Double tops and double bottoms

Introduction

Reversal implies a ‘change in direction’. Thus, reversal patterns are chart formations that tend to reverse the direction of the trend. These patterns can be spotted on the daily, weekly or monthly charts. The Existence of a prior trend is the most important prerequisites in analyzing trend reversal patterns. Many a time, a pattern that appears on the chart resembles a reversal pattern. However, if there were no major prior trends before the occurrence of this pattern, it becomes suspect. If on the other hand, one finds that a downward reversal pattern is being formed on the chart when the market has appreciated considerably, that reversal pattern is of significance and should be studied carefully. The second point to be studied carefully is the volume. Volume can provide insights in trend reversals. It should be used as a corroborative evidence of a trend, not as primary evidence. Volume can also be used to confirm price changes. When a trend starts, and there is no pick up in volume activity, that may mean that the trend is weak and does not have commitment. Volume precedes the price. If there is a pick up in volume, then that may mean that a change in price may be approaching. The direction of the movement during this increase in volume can be indicative of the upcoming action. In the following sessions we explain some important reversal patterns

Double tops and double bottoms:

Double top and double bottom formations are also called ‘M’ and ‘W’ patterns. A double top is simply two peaks. The pattern forms when the share price makes a run up to a particular level, then drops back from that level, then make a second run at that level, and then finally drop back off again resulting in a ‘M’ shaped formation. It is a reversal pattern. For confirmation that a double top has actually formed and that a reversal in the uptrend is at hand, a common strategy is to look for declining volume going into the second peak and rising volume on a break below the bottom of the trough which has formed between the two peaks (support).Here too, volume plays an important part.

Example of Double top:

Double Bottom

This is the opposite chart pattern of the double top as it signals a reversal of the downtrend into an uptrend. The pattern forms when the share price makes a run down to a particular level, then trades up from that level then makes a second run down to at or near the same level as the first bottom, and then finally trades back up again, resulting in a ’W’ shaped formation. For confirmation that a double bottom has formed and that a reversal in the downtrend is at hand , a common strategy is to look for declining volume going into the second trough and rising volume on the break of the peak which has formed between the two troughs (resistance).

Example of double Bottom:

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1 Response to “Reversal Patterns 1 : Double tops and double bottoms”

Dasia

September 21, 2011 at 5:33 pm

Heck yeah this is exactly what I neeedd.

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