Written and copyright © 2011-2013 by Thomas N. Bulkowski. All rights reserved.
Busted Double Top Summary
Busted double tops are double tops in which price breaks out downward and drops less than 10%, turns around, and then closes above the top of the double top.
The following move in the busted direction (upward) averages 38% and the median gain is 31% (both numbers are for single busted patterns only), or a 19% median gain for all busted double tops.
Single Busted Double Tops
Busted double tops come in three varieties: single busts, double busts, and three or more busts.
Single busted double tops look like the chart on the right. Price forms a double top at A and B which confirms as a valid double top when price closes
below the chart pattern's low, which is at C. That occurs at D.
Notice that price doesn't drop far before recovering and closing above the top of the chart pattern, at E. This busts the double top.
Not shown, but price continues
rising more than 10% above the top blue line. For your viewing pleasure, I show horizontal blue lines that represent the highest peak and lowest valley in the chart pattern.
For a single bust, look for:
- Price must confirm the double top by closing below the bottom of the double top (that happens at D in this example).
- Price must drop less than 10% below the bottom of the double top (the difference between C and the low after D).
- Price rises and closes above the top of the double top (E).
- Price continues rising at least 10% before either closing below the bottom of the double top or dropping by more than 20% from a peak.
The last point, 4, means the ultimate high must be at least 10% above the top of the double top. If price fails to climb more than 10%, then it could be forming
a double bust.
Double Busted Double Tops
The chart of Sherwin-Williams (SHW), pictured on the daily scale, shows an example of a double busted double top.
Price forms a double top at A and B, confirmed when price closes below the low between the two peaks at C. Price continues lower to D, which is less than 10% below
the bottom blue line (which marks the lowest low in the chart pattern).
Price rises and eventually closes above the top blue line (the top of the chart pattern) at E. When that happens, it busts the double top for the first time.
Notice that price does not rise much above the blue line (less than 10%)
before reversing and dropping.
Price busts the double top a second time at F when it closes below the bottom blue line. Price continues lower, to G in this example, eventually dropping more than
10% below the bottom of the double top (not shown) and ending the search for busted turns.
For a double bust, look for these elements.
- Price must confirm the double top by closing below the bottom of the double top (below the blue line at C).
- Price must drop less than 10% (the move to D below the bottom blue line).
- Price rises and closes above the top of the double top (this happens at E).
- Price fails to rise at least 10% above the highest peak in the double top before reversing (the rise from the blue line to the peak at E).
- Price closes below the lowest valley in the double top a second time (point F).
- Price drops more than 10% below the bottom of the chart pattern.
Double Top, Triple Busts
Triple busts are rare, but the word triple is misleading. I counted every pattern that had three or more busts.
The chart of AON (AON) is an example of a multiple bust double top.
The double top occurs at A and B. When price closes below the lowest low in the pattern at C, it confirms the double top. Price in this example drops to D, which is less than 10% below
the bottom blue line (which shows the lowest low in the double top).
Price recovers and rises to E, which busts the chart patterns for the first time. Price does not rise more than 10% above the top blue line before reversing and dropping to F.
F closes below the bottom blue line and busts the double top for the second time. The drop to F is less than 10% below the bottom blue line before price reverses again and
closes above the top of the double top at G.
At G, price busts the double top for a third time.
In this case, the busting continues when price climbs less than 10% above the top blue line before dropping to H, which is the next close below the bottom blue line. That busts
the double top again.
For a triple (or more) busted double top, look for the following:
- Find a double busted pattern in which price, after the second bust, fails to drop more than 10% below the bottom of the double top. That is point F in the figure.
- Price rises and closes above the top of the double top (point G).
- Price must rise at least 10% above the top blue line to stop the busted count at three. If not, then additional down and up cycles (each less than 10% from the nearest blue line)
may continue, busting the double top.
Methodology for Testing Busted Double Tops
I found 2,333 double tops in 945 stocks dating back as far as July 1991 to October 2011. Few stocks covered the entire period. All of the double tops I found manually either
using a historical search or real time (looking at my stocks each day). The real time editions prevented any look ahead bias since I am not privy to future price movements.
I then used software to measure performance and flag busted chart patterns.
Gauging performance uses the same method as I used to catalog non-busted chart patterns. That is, the search for the new ultimate high or low proceeded as described in the
glossary. Thus, the numbers reported in Results should be considered perfect trades.
Busted Double Top Test Results
The following numbers are the results from perfect trades in bull markets, unless otherwise noted. Do not expect actual trading results to match those discussed below. Use the numbers
only for comparison purposes with other chart patterns.
How often do double tops bust?
- Single busts: 23% of the time.
- Double busts: 5% of the time.
- Triple or more busts: 5% of the time.
- All busted double tops: 33% of the time.
Of busted double tops, what is the frequency distribution?
- Single busts: 70% of busted double tops bust only once.
- Double busts: 16% of them bust twice.
- Triple or more busts: 16% of them bust at least three times.
If you trade a busted double top, there is a 70% probability that it will bust just once. Thus, 30% fail to show price rising by more than 10% above the top of the
What is the average rise for single busted double tops? As measured from the top of the chart pattern to the ultimate high...
- The average rise: 38%
- Median (mid range) rise: 31%
- The average rise (for comparison) of double bottoms (busted and non-busted) is: 38% from 2,213 double bottoms in a bull market, updated using data to October 2011
What is the rise from perfect trades after all busted double tops?
- The average rise in a bull market: 28%
- Median (mid range) rise in a bull market: 19%
- The average rise in a bear market: 17%
- Median rise in a bear market: 13%
What is the failure rate of all busted double tops? The answer appears in the below table.
Failure Rate for Busted Double Tops
|Failure rate:|| 5% || 10% || 15% || 20% || 25% || 30% || 35% || 50% || 75% || >75% |
|Number of double tops:||98||85||49||50||37||26||27||55||48||66|
For example, there were 98 busted double tops that failed to show price rising at least 5% above the top of the double top.
Those represent 18% of all busted double tops. On a cumulative basis (a running total), they also represent 18% of all busted double tops.
The median rise of all busted double tops is 19%. You can find that by interpolating the 15% and 20% columns.
Thus, half of all busted double tops will see price rise at least 19%.
Trading Busted Double Tops
I show a chart of Conns (CONN) on the daily scale.
An Adam & Adam double top appears at A and B, confirmed at D when the stock closed below the low at C.
Price did not drop far before climbing up to E and closing above the highest peak in the pattern. That busted the stock.
A buy stop placed a penny above the price at A would work well in this situation.
Price continued its strong straight-line run upward until rounding over and peaking at F. If you did not take profits near that peak, you quickly returned gains to the market.
The move from E to F measured (9.98 - 6.92)/6.92 or 44%.
Entry Setup for Busted Double Tops
As an entry setup, here are the rules for trading busted double tops.
- Find a confirmed double top.
- Price must not close lower than 10% below the bottom (lowest valley) of the double top.
- Place a buy stop a penny above the tallest peak in the chart pattern.
- Price rises and closes above the top (highest peak) of the double top. This confirms a busted double top.
- Place a stop loss order to sell if price closes below the bottom of the double top.
- Hold until the trend changes and then sell.
This entry setup can mean a large drop from the entry to the stop price, if things go wrong. Even if things go right, how do you detect a trend change to sell? If price climbs in a steady trend,
then selling when price closes below a trendline often works well. Perhaps other bearish chart patterns will appear and signal the move from bull to bear. Or perhaps you wish to use indicators.
Use whatever sell method works for you.
-- Thomas Bulkowski
Written and copyright © 2011-2013 by Thomas N. Bulkowski. All rights reserved. Procrastinators do it tomorrow.