Under classic chart patterns, we will be discussing about Double Top and Double Bottom pattern.
A double top is a chart pattern which is characterised by two consecutive peaks in price that signals a potential bearish reversal of an uptrend while a Double bottom pattern is characterized by two consecutive troughs in price that signals a potential bullish reversal of an downtrend pattern.
Double Top Pattern
The double top chart pattern is considered to be an indicator of an intermediate or long-term reversal in price. The double top chart pattern occurs at the top of a prolonged uptrend.
After reaching a high the price moves significantly lower to make a trough before making another attempt at breaking out to new highs.
The second peak comes close to reaching the first peak but occurs with relatively low volume as bulls lose confidence in the rally. As the price drops again, the volume begins to accelerate as bears take control over the market and bulls exit their positions.
The chart pattern is confirmed when the price breaks down below the low point of the trough.
Double Bottom Pattern
The double bottom pattern is characterized by a fall in price followed by a rebound followed by another drop to a level roughly similar to the original drop and finally another rebound. It is best suited for analysing the intermediate- to longer-term view of a market.
The pattern always follows a major or minor down trend in a particular security, and signals the reversal and the beginning of a potential uptrend.
Normally the second bottom can be rounded while the first bottom should be distinct and sharp. Generally a double bottom's volume is greater on the left of the bottom than on the right.
Volume usually is downward as the pattern forms and accelerates as the pattern hits its lows. Then the volume increases again when the pattern completes while crossing through the confirmation point.
(The author is Associate Vice President | Analyst-Derivatives at Motilal Oswal Financial Services Limited)
Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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