Chart Patterns
Double Tops and Double Bottoms
If you use short term up trends (STUT) and short term down trends (STDT), it is possible to then identify peaks and troughs. The definition of a peak is the highest point between a STUT and a STDT. A trough is the lowest point between a STDT and a STUT. *** Sidebar *** A short term up trend exists when there are two consecutive days of higher highs and higher lows. A short term down trend is the exact opposite and exists when there is two consecutive days of lower highs and lower low. *** Sidebar *** If a security exhibits higher peaks and higher troughs, then it is in a medium term up trend. Similarly, when it exhibits lower peaks and lower troughs, it is in a medium term down trend. If however it fails to achieve a higher peak, rather it forms a similar peak to the previous peak, it is likely to be forming a double top. You can see this displayed in the chart below.
In the chart above, the security forms a similar peak (marked with the red line). When this occurs, there is reason to doubt the strength of the present trend however further evidence is required that the trend has ended. When the security trades below the previous trough, the security is on its way to forming a lower trough than the previous one. When this occurs, not only has the security failed to achieve a higher peak, it has also failed to achieve a higher trough. This is sufficient evidence that the medium term up trend has ended and that a new medium term down trend has commenced. The double top is not complete (and therefore shouldn’t be traded with), until the security trades below the previous trough (the lowest point between the two peaks that form the double top). When a double top forms, the previous trough now becomes a significant level. It was at this level that the security last experienced support and should the security trade below this level, then the support is obviously no longer there, and this does not present a positive outlook.
In the chart above, you can see where a double bottom has formed. Opposite to the double top where the previous trough is important, the middle peak between the two troughs becomes the significant level for the double bottom forming.It is widely accepted that a trend should be assumed to still exist until there is absolute evidence that it has ended. Absolute evidence would be where a trend in the opposite direction has been established.
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