How To Cash In On Double Tops and Bottoms In The Stock Market
August 22, 2009 by Sean Phelps
Filed under Stock Market
Professional traders kill amateur traders in the stock market with double top and bottom patterns. Do not be another victim. In fact, after reading this article you will be able to get the revenge you deserve.
All stock market rallies reach a point where bulls say, ok, I’ve made enough, I’m going to sell and take profits. When this happens, charts will top out when not enough new bulls are coming in to offset their profit taking.
Bulls who just bought in are mad as they came in too late. They are trapped. Their position continues to pile on losses. Should they hold on or sell for a loss? Only when enough bulls decide the stock has overreacted on the downside will they come in and buy. The rally will resume to the upside as more bulls rush in to buy on weakness. As prices approach the level of their old top, you can expect sell orders to hit the market.
There are always those traders who were trapped in the previous reversal and now they have sworn to their gods to jump out if the market would just give them another chance by rising to its old high.
An exact opposite situation happens in the stock market at a bottom. A stock falls to a new low at which enough shorts start taking profits by covering their positions which causes the market to rally. Once that short covering rally stalls and the stock begins falling again, all eyeballs are on that previous low-will it hold? If fear is greater than greed, prices will break below that previous low which will mark a continuation of the downtrend. If greed is stronger than fear, the downtrend will stop near the old low forming a double bottom. Your other technical indicators will help you figure out which of the two possibilities is more likely to occur.
Whenever you see a stock climb to its previous high, the first question in your mind should be will the stock climb to a new high or form a double top and head back down. Technical indicators like the RSI, MACD, and volume are very helpful in answering this question.
If a stock climbs to its previous high, if the volume, MACD, and stochastics are dropping then a double top is likely to form.
When a stock falls to its previous low, a double bottom is most likely to form when the volume, MACD, RSI, and stochastics are rising.
