As of 11/20/2024
Indus: 43,408 +139.53 +0.3%
Trans: 17,002 -26.31 -0.2%
Utils: 1,055 +1.25 +0.1%
Nasdaq: 18,966 -21.33 -0.1%
S&P 500: 5,917 +0.13 +0.0%
|
YTD
+15.2%
+6.9%
+19.7%
+26.3%
+24.1%
|
 46,000 or 43,000 by 12/01/202418,000 or 16,600 by 12/01/20241,075 or 1,000 by 12/01/202420,000 or 18,400 by 12/01/20246,100 or 5,800 by 12/01/2024 |
As of 11/20/2024
Indus: 43,408 +139.53 +0.3%
Trans: 17,002 -26.31 -0.2%
Utils: 1,055 +1.25 +0.1%
Nasdaq: 18,966 -21.33 -0.1%
S&P 500: 5,917 +0.13 +0.0%
|
YTD
+15.2%
+6.9%
+19.7%
+26.3%
+24.1%
| |
|
46,000 or 43,000 by 12/01/202418,000 or 16,600 by 12/01/20241,075 or 1,000 by 12/01/202420,000 or 18,400 by 12/01/20246,100 or 5,800 by 12/01/2024 | ||
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The double top setup indicates that the time to decline after a double top (CD in the figure below) is similar to the rise (AB) leading to the chart pattern. Use this time measurement to determine the value of an option.
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. The decline after confirmation nearly equals the rise leading to the double top.
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.
This is not an easy pattern to identify in an emerging price trend nor is it plentiful. Here is what to look for.
Not all double tops will return to the launch point. In this study, just 24% looked like the above figure. Most patterns did not fit the right shape, that is, they lacked a strong move up to the double top. With others, the double top itself was suspect as a valid chart pattern (the peaks looked too far apart in price).
Nevertheless, if you find a flat base or congestion region that precedes a sharp move up to a confirmed double top (or other reversal pattern), then count the number of days from the swing low at the start of the trend (point A), to the highest high at the first peak (point B, or swing high if it's a different reversal pattern). This will be the approximate number of days it will take for price to return to the launch price after confirmation (C to D).
In 70% of the cases where price did return to the launch price, it took less time than the AB move. So, be conservative and use the AB time to project from C. In a startling number of cases, the move from C to D is very short. Twenty seven percent of the double tops reached the target in 5 days or less, 19% made the trip in 3 days or less (13% in 2 days, 4% in 1 day).
Point D is the target price and AB is how long it will take to get there. Use those to determine whether your put option will be worth the price of a trade.
Other setups that look similar to the above figure share common characteristics. Look for a flat base (a horizontal price trend) or congestion area (the stock hovering around the same price for a week or more) followed by a sharp, 60 degree or higher straight-line price rise. You want a quick move up, with few pauses, so a stock rising at 30 or 45 degrees or one that retraces every week or so will not cut it. The slope of the trendline needs to be steeper and it should be a near straight-line run. You want to see buying enthusiasm push the stock up.
Then look for a reversal pattern. If you are adept at spotting diamond tops, then look for those, but any reversal pattern will do. These include double or triple tops, head-and-shoulders tops, and the triangles – ascending, descending, and symmetrical. Wait for the breakout before trading.
Expect price to return to or near the launch price. However, if price stalls above the launch price, then cash in your chips and look elsewhere. Not all stocks will hit the target so it's best to be conservative.
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.
-- Thomas Bulkowski
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