Perhaps one of the most obvious signals in the chartist's arsenal is the double top or the double bottom. It is favoured by all chartists as a major reversal signal and is generated by price retesting a previous high or low.
A double top often signals the end of a bull market. It consists of a top, followed by a pullback and then a retest of that original top. The subsequent price action usually consists of another decline, at least to the previous retracement low.
One can project an ultimate target at twice the distance of the first retracement from the high. If the first retracement was 50 points off the high, then the projected target for a double top is 100 points off the high.
A sell signal is generated once the first high has been touched. Another sell signal is generated on a break of the first retracement level.
In the example below, the double top has been created and the first target at the first retracement level has almost been reached. A new sell signal will be generated on a break of that first retracement support level. Its target is the same distance below the first retracement level as the distance from the high to the first retracement level.
A double bottom is the reverse of the double top, but the same principles apply. A double bottom is created when a market makes two lows at the same price with some time in between. It generally signals the end of a bear market trend or at least a deeper correction in time or price.
A buy signal is generated following a test of the old low. The initial target for the trade is the first retracement level that has already been established. A rally through this initial target would signal a move of similar magnitude above the first retracement level. The new target is twice the distance from the low, as from the low to the first retracement.
© The MacLean Group Pty Ltd ACN 096 967 038. All rights reserved 2003. This article has been prepared by The MacLean Group and licensed to ASX. The views are those of the author and not of ASX. This material is educational and it is not intended to constitute financial advice.