Stock Market for Beginners

What are Double Tops and Bottoms?

A double top or bottom is another reversal pattern, which is common and easily recognized.

• Double Top Pattern

1. A prior uptrend sets a new high, usually on increased volume.
2. Then, the stock price declines on a lighter volume.
3. The price rallies again but is unable to pass the previous peak and falls again.
4. If the price breaks support, declining below the previous low, a double top pattern has formed. (If the price does not break support, this might not be a reversal pattern since prices could just be in a consolidation phase, just before it resumes to its original uptrend.)
5. After a double top pattern has formed, there is a possibility of a return move to the breakout point, but should not exceed it, before prices resume to the new downtrend.

Volume during a Double Top Pattern

In a double top pattern, there is usually heavier volume during the first peak and lighter volume on the second. However, when the price breaks support, signaling a reversal to a downtrend, it usually occurs on heavier volume.

• Double Bottom Pattern

A double bottom pattern is a mirror image of the double top.

1. A prior downtrend sets a new low, usually on higher volume.
2. Then, the stock price rallies.
3. The price declines again but is unable to fall under the previous low and bounces up again.
4. If the price breaks resistance, rallying above the previous peak, a double bottom pattern has formed. (If the price does not break resistance, this might not be a reversal pattern since prices could just be in a consolidation phase, just before it resumes to its original downtrend.)
5. After a double bottom pattern has formed, there is a possibility of a return move to the breakout point, but should not decline below it, before prices resume to the new uptrend.)

Volume during a Double Bottom Pattern

In a double bottom pattern, there is usually heavier volume during the first bottom and lighter volume on the second. However, when the price breaks resistance, signaling a reversal to an uptrend, it is important that it occurs on heavy volume.

Example of a Double Bottom Pattern:
Citigroup’s stock just recently formed a double bottom at around $2.80 and rallied up over $4.40, which was yesterday’s close. The stock is now trading at $4.70 so if you bought at the second bottom and sold it now, you would have made a 68% gain!