**** Reversal Patterns
Reversal patterns indicate a high probability that the existing trend has come to an end and that there is good chance of the trend reversing direction. They give entry signals early in the formation of a new trend, making their entries quite lucrative, with fairly small protective stops. However, the trend might not reverse immediately and may enter a trading range instead.
As with continuation patterns, there must be an existing trend that is to be reversed. Without a pre-existing trend reversal patterns are not valid. The common reversal patterns include double tops and double bottoms, triple tops and triple bottoms, head and shoulders, rising and falling wedges, and the less common rounded tops and rounded bottoms.
1- Double Top and Double Bottom Patterns
The double tops and double bottoms patterns are two related chart patterns that are some of the easiest trend reversal patterns to identify that appear on line, bar, candlestick charts, and Point-and-Figure charts.
A- Double Top
VIew a more detailed Double Top Chart Pattern Video. The Double Top technical analysis charting pattern is a common and highly effective price reversal pattern.
The chart below of Altria (MO) stock illustrates the Double Top reversal pattern:
double top chart reversal
Double Top Formation Components
First High: Bulls push prices upwards making new highs; however, these new highs are short lived and prices retreat.
Second High: Prices don't retreat for long because bulls make another run, making a similar high. Nevertheless, this is bearish, because bulls were unable to push prices higher; bears held their ground at the previous high level. The bears push prices back to support (Confirmation line); this is a pivotal moment - either bulls will make another push higher or bears will take control and push prices even lower, more than likely taking over for good.
Double Top Sell Signal
Sell when price closes below the confirmation line.
Note that traders expect a significant increase in volume to accompany the confirmation line break; if there is very little volume when price pierces the confirmation line, then the move downward is suspect. Small volume usually means weak support of price movement (see: Volume).
Another similar chart pattern is the Head & Shoulders Pattern (see: Head & Shoulders). The opposite of the Double Top is the bullish Double Bottom (see: Double Bottom).