The Trend

Double Tops and Bottoms: Technical Analysis 101



Remember, understand how the market moves… and you increase your odds of success.  In theory, markets are pushed higher and lower by fear and greed – two of the strongest psychological drivers of all assets.

The more fear there is in an asset, for example, the higher the chance the value of that asset will decline.  The more greed there is in an asset, the higher the chance the value of that asset will increase.

Or, many times you’ll hear technical analysts refer to the ongoing tug of war between bulls and bears, or the struggle between buyers, which represent demand, and sellers, which represent supply.

When looking at fear and greed on a chart, we begin to look at the technical parameters of support and resistance, or a price floor or ceiling, as we noted in our initial discussion on support and resistance lines.

When prices are falling to the floor, support represents the moment when buying begins to overwhelm selling and prices begin to bounce back.  Conversely, when prices move to the ceiling, resistance is the point where selling begins to overwhelm buying and price increases begin to reverse.

You can identify support and resistance by studying charts.


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Look for a series of low points when a stock continues to fall to a certain level, but then doesn’t fall any more. Typically this is support.  And when you find a stock that rises to a certain high, but rises no more, you have found resistance points.

The more times a stock bounce off support and resistance, the stronger these support and resistance lines become for technical analysis.  If something repeats itself again and again, it becomes a stronger indicator of potential pivots at high or low points on a chart.

Two ways to find great support and resistance is through the identification of double tops and bottoms.  If your stocks bounces off the same support level, or fails at the same resistance level at least twice, we can make an argument for selling or buying said asset at each pivot point.

When it comes to double tops, these can typically be found at the peak of an upward trend, and can oftentimes be a signal that the prior upward move is beginning to weaken with buyers losing interest. 

A double bottom on the other hand is the opposite.

It can signal the reversal of downtrend, and begin to show us strength after an asset pulls back.  Once double bottom is proven to hold, an argument can be made for a potential reversal to the upside.

Lightspeed Trader Chart Courtesy of Lightspeed Trading

For example, if we study this chart from Apple, we can clearly see where the buyers come in to support the stock, and where sellers begin to overpower buyers at double top resistance points.

If you can identify such patterns you can potentially increase your odds of success.

 

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