Sell signal from double top formation

A sell signal from a double top formation signals increasing pessimism among investors and the beginning of a falling trend.

A double top formation is a top formation which marks the end of a rising trend. The formation consists of two tops of about the same height. The sell signal is triggered when the price breaks down below the tops.

At the first top, investors are optimists. The trend is rising and things are looking good for the company. As the second top is formed, the optimism wanes. Many are disappointed when the stock does not reach above the previous top and thereby possibly does not continue the rising trend. When the price breaks down below the bottom between the two tops, the support there is broken. Optimism has been replaced with pessimism and a falling trend has begun.

A stock that has triggered a sell signal from a double top formation is indicated to continue falling, for at least as long as the formation is high.

Details

False sell signals are triggered fairly often from double top formations. This is especially the case when it is a small formation, when the stock is still in a rising trend channel and when volume development is positive. At a sell signal from a double top formation the stock as a whole should be assessed, not solely the sell signal. Many investors have sold long term winners too soon following weak signals from double top formations. The following applies:

• Big double top formations are stronger than small ones.
• Sell signals with negative volume development are stronger than sell signals with positive volume development.
• Sell signals with a clear break down from a rising trend, including break below the previous pivot bottom, are stronger than if the trend and pivot bottom have not been broken.