In my first article on technical analysis patterns I taught you about support & resistance and how to best identify them on stock charts. In this article I will be teaching you about double tops and double bottoms. Before I delve into how these patterns work you need to understand about neckline measurement rule.
Technical Analysis Patterns – Neckline Measurement Rule
Estimating the probable strength of a move can be calculated with the neckline of a pattern. Constant analysis is always advised as the neckline rule does not apply exactly to all the moves. It can be used with a number of patterns and is useful in determining any potential trade.
Long ranges up & down to a neckline dictate volatile bullish and bearish implications. Please note that the target is a potential objective. Prices can often zig zag.
Technical Analysis Patterns – Double Top (Reversal)
Double tops are significant reversal patterns. It is where a high has been reached twice before retracing. This indicates weakness as the stock did not have enough strength to rise above the previous high.
They have a support at the neckline level. This neckline level is the previous low of the stock. When this area of support is reached, the reversal pattern is completed.
When support at this neckline fails, the market is flooded with fear and sellers soon outnumber the buyers.
At this stage the emotions influencing a person to sell are far greater than the emotions influencing a person to buy.
Double tops also occur at the end of a significant up-trend. This faltering lead-in up trend depicts that there are less buyers will to push the price up.
An up-trend can be broken with a double top reversal pattern. This weakening and lack of conviction phase of the stock is a classic trend breaking pattern.
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Technical Analysis Patterns – Triple Top (Reversal)
Triple tops (an extension of a Double Top) are significant reversal patterns, where the stock has attempted to rally on 3 occasions.
It has struggled unsuccessfully on 3 occasions to close above the level of resistance.
Where support at the neckline is reached, we then have the completion of the reversal patterns.
When support at this neckline fails, the stock again is flooded with fear and supply exceeds demand for the stock sending it downwards.
Technical Analysis Patterns – Double Bottom
A double bottom is essentially a mirror images of a double top. It usually occurs at the end of a down trend and forms a base of a support level.
The double bottom is formed when the price cannot move past the support level to form a new low.
You can see the sellers are losing momentum and are unable to push the prices down any further. This is a very bullish signal.
The neckline level is the previous high of the stock. When this area of resistance is reached, the reversal pattern is completed. If the neckline fails, the buyers soon outnumber the sellers and an uptrend is initiated.
Technical Analysis Patterns – Triple Bottom (Reversal)
Triple bottom patterns (an extension of a double bottom formation) are characterized by very strong levels os support. the stock has failed on 3 occasions to close below this particular support level.
Resistance is formed at the neckline. When the neckline fails on heavy volume the buyers soon outnumber the sellers and an uptrend is initiated. (A bullish implication)
These technical analysis patterns are very commonly found on stock charts and understanding these patterns can increase your likelihood of being successful on the stock market.
Mastery of Stock Market Intelligence is an education that will take your trading to a whole new level. It will teach you technical analysis patterns and techniques that will increase your probability of profiting from the stock market.
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Stay tuned for my next article on Head and shoulder patterns.
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patterns. In this article I will be covering support and resistance. Support and resistance are levels where pricing action on a stock chart hits and simply just bounces off it.
Technical Analysis Patterns: Support Levels
Support levels give the stock support and will generally cause the stock to bounce off them in an upward direction. Stock prices are supported off the horizontal line. It’s a price point where buyers begin to out-number sellers.
This floor of support indicates indicates that sellers are becoming less enthusiastic in exiting and selling their stock.
A support level holds prices up. Stock prices keep lowering down to the support level and are seen to continually rebounding of it again.
When a stock prices breaches through a significant support level, the stock price is likely to plummet as investor fear becomes apparent and a reality.
Technical Analysis Patterns: Resistance Levels
Resistance levels are the exact opposite and tend cause the stock to bounce off them in a downward direction. A resistance level depicts the highest price anyone is willing to pay for a stock. Sellers defeating the bulls. Stock prices continually rise in price to hit the overvalued resistance level, then drift back down again.
When the stock price breaches through a significant resistance level, the stock price is likely to trend upwards fast as investor greed becomes apparent and a reality.
Technical Analysis Patterns – Support & Resistance Changing Roles
Support and resistance barrier levels will often change roles. Once a stock gains enough momentum to break through each level, the role of this level is now reversed.
Support and resistance levels are validated at horizontal lines, they will often be found at round numbers. The longer stock prices remains at a significant horizontal line, the more valid that price zone is for the stock.
A support level is a price zone which can halt a possible fall in the stock price, whereas a resistance level is a zone which provides an obstacle for a future higher stock price.
Support and resistance levels can be horizontal or sloping lines.
Technical Analysis Patterns – Psychology of Human Emotion
Support levels depict the lowest price anyone is willing to pay for a stock, hence the buyers are defeating the bears. However, if the stock is to sell for less, owners exhibit the following primal instincts. The cycle begins:
FEAR
The stock is being sold off. “Should I exit?” “What if I am wrong?”
Support has been breached. “What if the price drops further?”
“I’d better take what I can get” – “Forget about the idea of profit, I just want to recoup back my initial investment” – a familiar story
SELL, SELL, SELL
GREED
Prospective educated buyers wait for a testing of support. Further validation indicates that bargain hunting is taking place. Buyers enter a rising buying volume confirms the move. The stock is now moving effortlessly and is fast approaching the resistance level. SELL, SELL, SELL.
Meanwhile the average investor awakens & reads in the newspaper that the stock is poised for explosive growth. “I don’t want to miss out, I want to make money back from the previous trade”. BUY, BUY, BUY.
The stock hist resistance and profit taking with large selling volume is confirmed. “It’ll come around, I’ll just sit & wait” – LONG TERM!!!
To be successful in identifying technical analysis patterns you need to be educated. It’s no use in getting onto a trade because of a hunch or a tip. Most of the time you will just be donating back to the market.
Mastery of Stock Market Intelligence is an education that will take your trading to a whole new level. It will teach you technical analysis patterns and techniques that will increase your probability of profiting from the stock market.
Discover why everything you’ve been told about the stock market is completely WRONG… And why it may be costing you thousands of dollars each and every month…Or more!
FREE Technical Analysis Patterns Report. Register RIGHT NOW to get Private Access to this FREE Confidential and Exclusive Report.
Stay tuned for my next article on double tops and double bottoms.
Make it a great day!
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