No trend lasts forever. Human nature is predictable we fear when we should be greedy and we should be greedy when people are fearful. I believe that Warren Buffet stated something to that effect. Its true, that as traders and investors when we see a good thing we are sometime blinded by how well it is doing not realizing that the music is about to end, and that is the key how to recognize when does the music end?
Like all patterns double tops take some time develop and that can be a little frustrating because that means we have to be patient, but be assured the results can be worthwhile. Remember good things come to those who wait.
Double top patterns generally occur some where there is a new high being created or at least where a previous high existed. The crowd when it reaches these tops begin to wane in there enthusiasm for the price move. They begin to question, Is the price moving to fast? So what do they do the begin to take there positions off and this causes a brief confidence break but rest assured there are still buyers that are interested and the jump back in.
At this point it becomes imparitive to let the crowd dictate what will happen. Institutions at this point are controlling the money flow and if there are sell order at that sell point (resistance) you better believe there might be a collapse coming.
This was no more true than what happened last year on the SPY.
In the midst of a political debate in the summer of 2011 over the debt ceiling the SPY had reached a high of $136 in May and then sold of to some major support around $126.
Now its interesting that a double top begins with some sort of big rally or move up because this where buyers feel confident that the market is not at a top, and just like clockwork it bounces of support.
The next phase is where confidence is shaken. The rally runs right into resistance and sell order are most likely some where in that range. So the rally stalls and pulls back, and it pulls back to a key fib retracement 62%.
By this time there is much in the way of negative sentiment in the market and if sentiment shifts so will the majority of investors and that eventually means that regardless of the small rally that takes place that topping is about to be reversed.
So as you can see double tops are a quite a powerful trend reversal trade. If the conditions are right it makes it a pattern worth trading. Some simple things to remember.
1. Generally look for a decent rally into resistance
2. Look for a fib retracement of 62% (sometimes it will test support and bounce back up)
3. When the second peak occurs this favors a good entry place with lower risk, you can opt to trade the break in the 62% support level) Follow your trade plan when entering the trade.
Just as an observation I noticed that the SPY might be in the preemptive stages of forming a double top. Although not at the top of trend it certainly still has some validity as a tradeable pattern.
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Disclaimer: This article is intended to be informative and does
not constitute a buy, hold, or sell recommendation., and should
not be construed as personalized advice as it does not take
into account your specific situation or objectives
