Today we are going to discuss one of the most common and active chart formations. Along with fundamental analysis, an in-depth technical research is also required to predict price movements and market scenario. Double top stock chart pattern indicates a reverse trend which appears at the end of the trend. Therefore, it is a bearish reversal chart pattern.
Double Top Stock Chart Pattern
Double top stock chart pattern comes after a prolonged bullish trend. After reaching a peak point, there will be a sudden decrease in price level up to a certain amount. This is first peak formation of the double top stock chart pattern. The second peak forms right after the short downtrend and after that, there will be a breakdown of the price level. This formation creates a “M” like chart pattern which is known as the double top.
To clarify the pattern, here are some of the key points. After mentioning these points, we’ll walk through an example.
- The pattern begins to establish after a prolonged uptrend.
- After the first peak point, the market pulls back up to 20% to 20% and create a neckline.
- There will be another peak point after the short pull back.
- The difference between two tops is near about 3% to 4%, not more than that. However, this can be higher in higher time frame charts.
- Two peak points separated by a minimum price level refers to a valley.
- Even after the second peak point, the double top is still not complete. When price line is broken after the second peak, a complete double top forms.
- The price is going to form a bearish trend, taking a long time.
- It is not just an overnight formation.
As I have stated above that we’ll go through an example here. I’m going to put a recent scenario of Manappuram Finance.
This is monthly chart of Manappuram Finance (LTP 104.90). The chart is taken from Zerodha Kite. Let’s focus on the above chart pattern.
The prolonged uptrend had started to form before a long time back. As we can see here that the price breaks the neckline and completes the double top pattern. When the price breaks the valley between two peaks, ‘M’ shape generates. The break-line is near about at Rs. 107 that indicates there is a high possibility of a downtrend in next few months. After breaking the price level at Rs.100, next possible support will be at Rs. 85 which is 20% low and after that Rs. 65 will be the expected support line. You are advised to work with a stop loss of 110-112 and target at 88.
One of the main reasons behind the pattern can be due to an overbought stock. Many of the investors believed that the management of the company might grow, expected a hike in the price level, that’s why they held the stocks for years. Hence, the stock has rallied a lot and finally, the over-bought situation arises. Now, at this present scenario, they try to sell the stocks to book their profits. As a result of this profit booking, the double top stock chart pattern emerges.
However, the pattern indicates a bearish market trend. In order to identify the pattern completely, traders have to wait for the breakdown of the neckline completely. The pattern now advises us to sell Manappuram at current market price in the futures market. Hold till the target is achieved and carry forward future contracts as and when necessary.
Categories: Trading Strategy