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This is the same information as the Double Top Setup but without the trading implications.
Summary
When trying to measure how long it will take a stock to reach the launch
price after confirmation (the CD move in the above figure), the time to rise from A
to B is a good proxy.
Details
I conducted a study to discover how
long it takes price to return to the launch point after a confirmed double top. If
you trade options, knowing how quickly price will hit a target is vital.
Referring to the above picture, I examined
1,333 double tops from 1/1990 to 6/2006 in 317 stocks and found 309 that looked
like the picture. A flat base or congestion
region preceded the double top. Then price moved up in a straight-line run (AB) to
the double top. The double top appeared
and confirmed when price closed below the valley between the two peaks (the
red
line at C). Then, price returned to the launch
price (D).
I measured the time to rise from the trend
start at A to the peak at B and compared it to the decline from confirmation, C, to
the launch price, D.
The AB move took an average of 24 days.
The CD move took an average of 19 days. This is perhaps not surprising because the
distances are shorter, that is, CD is shorter than AB
on a price basis. But, we are measuring time. I chose the confirmation point
because that’s when a twin peak
becomes a true double top and that’s the sell signal for a stock holding or
the time you buy a put option.
When trying to measure how long it will take a stock to reach the launch
price after confirmation (the CD move in the above figure), the time to rise from A
to B is a good proxy.
Identification Guidelines
This is not an easy pattern to identify in an emerging price trend nor is it
plentiful. Here is what to look for.
- A flat base that precedes the double top. The best performance comes from a
region of tight price congestion which provides a good solid support region for the
move up.
- A straight-line run up. It is best if no pauses occur on the run up to the
first peak. A quick price climb (a high velocity move) also helps with performance.
A quick decline often follows a quick rise. See
price velocity for more
details.
- Find a double top. Any of the Adam and Eve combinations will do
- Confirmation after the breakout
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