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Thomas N. Bulkowski’s successful investment activities allowed him to retire at age 36. He is an internationally known author and trader with almost 30 years of stock market experience and widely regarded as a leading expert on chart patterns. His four books, including the best selling Encyclopedia of Chart Patterns, have been translated into six languages. He may be reached at

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Bulkowski’s Double Top Study

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Written by and copyright © 2005-2009 by Thomas N. Bulkowski. All rights reserved.

This page describes a study using double tops that showed the time to decline after a double top (CD in the figure below) is similar to the rise (AB) leading to the chart pattern.

 

 

The double top chart pattern setup
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 approximation.

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 approximation.

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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

Example

Double top setup example

The chart on the right shows an example of an Adam & Adam double top chart pattern. The flat base is not clear on this chart, but it lasted over a month. Since this stock has a wide daily trading range, the base also shows large price swings. In that regard, the chart is not a perfect example.

The rise from A (the launch point that begins the straight-line run up) to B (the top of the first peak in the double top) takes 16 days. Price confirms the double top chart pattern at C. The decline from C (the confirmation point) to D (the low closest to the launch price), is 15 days.

See Also

-- Thomas Bulkowski

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Copyright © 2005-2009 by Thomas N. Bulkowski. All rights reserved. You’re unique, just like everyone else.