A discussion in Chat the other day prompted me to pull out some charts to demonstrate visually the points being covered. On this topic Ryan and I agree. Specifically, that seeing a double high in price just isn't enough in our book to call something a double top with any form of confidence when risking my money. Rather I would prefer to see some form of negative divergence in indicators to lead me to believe that the trend is weakening and ready for a reversal.
Now the learned gentlemen @ FreeStockCharts.com lay out some great guidelines in their Chart School on double tops:
- You have to have a prior trend to reverse.
- Volume increase on the breakdown [as they clear out stops] is helpful to confirm.
- Time. I'm also in agreement with them that I prefer to see one to three months elapse in the building of the two peaks. Remember, big money is placing their buy/sell orders based on weekly and daily timeframes. That's not to say that these conditions cannot exist intraday [5/15
