The chart below of Altria (MO) stock illustrates the Double Top reversal pattern:
Double Top Formation Components
- First High: Bulls push prices upwards making new highs; however, these new highs are short lived and prices retreat.
- Second High: Prices don’t retreat for long because bulls make another run, making a similar high. Nevertheless, this is bearish, because bulls were unable to push prices higher; bears held their ground at the previous high level. The bears push prices back to support (Confirmation line); this is a pivotal moment – either bulls will make another push higher or bears will take control and push prices even lower, more than likely taking over for good.
Double Top Potential Sell Signal
A potential sell signal is given when price closes below the confirmation line.
Note that traders expect a significant increase in volume to accompany the confirmation line break; if there is very little volume when price pierces the confirmation line, then the move downward is suspect. Small volume usually means weak support of price movement (see: Volume).
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