The Double Top and Bottom Pattern
The double top is a common pattern signalling the end of a bull market. It is characterised by two
consecutive peaks at roughly the same price level on a price-versus-time chart, separated by a price
valley known as the neckline.
This pattern is confirmed when the price drops below the neckline, suggesting an imminent or likely
further decline. Initially, demand surpasses supply, driving prices up to the first peak. Then, the
balance shifts, with supply exceeding demand, causing prices to fall. After the valley, prices rise again
as buyers return, but if they fail to exceed the first peak, sellers dominate, leading to a double top.
This pattern is generally viewed as a bearish signal if prices fall below the neckline.
The time between the two peaks is crucial; if they are too close, it might just be a consolidation,
indicating the trend may continue. Volume analysis also aids in interpreting this formation: the first
peak typically occurs on higher volume, followed by a decline on lower volume. The second peak
usually forms with even lower volume.
Double Bottom
A double bottom occurs at the conclusion of a downtrend in the market. It mirrors the double top
pattern but in reverse, with two consecutive price lows separated by a peak that defines the neckline.
Similar to the double top formation, the rules associated with volume are crucial: there should be a
noticeable increase in volume during the upward rally, while prices remain relatively stable at the
second bottom.
