The double top pattern is a reversal pattern that is used to help predict the tops of a market. It normally appears after a long bullish trend.
During an uptrend the given stock is continuously forming higher highs and higher lows. During a double top pattern the stock hits a higher high and pulls back significantly. The stock hits a bottom and rallies. This time however the stock is unable to make a higher high.
The fact that the stock did not make a higher high is a sign that the uptrend is starting to weaken. However it does not mean that the uptrend will end yet. From here the stock falls down and breaks below support. This support is the bottom that was formed during the last pullback. It also is accompanied with high volume.
Because the stock now failed to make a higher high and broke thru support on high volume this gives off a bearish signal. It signals that the uptrend has most likely stopped and a downtrend will take its place.
According to the pattern the target is equal to the difference between the two tops and support. This is how far the stock is expected to go. Of course the stock could go down much further if bearish pressure continues.
Anyone who is trading the pattern should be warned that this is not a one hundred percent accurate pattern. There are a few false signals just like every other indicator. If the stock breaks back above support then it was most likely a false signal. That means the stock probably will not go down.
Most professional traders will have a stop 3% above the support level. This is to give the stock some room. It could break above that level and immediately head back down below it.
To see an example of a double top pattern visit http://www.stocks-simplified.com/double_tops.html
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