MARKET TACTICS - Double Tops and Bottoms

MARKET TACTICS

The conservative chart reader will await the completion of a pattern before taking a position. Those more speculatively inclined may try to anticipate, and thus "buy at the top and sell at the bottom.” Proceed at your own risk.

There are several cautions to be observed. For one thing, the trader should not expect a small pattern that is, one that has taken form in a short time to support a big move. And, as we indicated at the outset, the Double Top or Bottom is a tough one to anticipate, even for the most experienced chartists. A favorable answer to the following questions will minimize the risk:

1.    Did the price decline about 5% or more from the first peak?

2.   Was there unusual volume around the first peak?

3.   Does the chart history of the stock designate this area as a likely major turning point, where, for example, long-range support or resistance is to be expected, or have major trendlines been broken?

4.   Is the general market in a downtrend, or at least neutral?

AMP is another perfect example of a Double Bottom formation with a little platform extension. Volume tended to expand slightly around each of the two bottoms and then pick up noticeably on the rally from the platform, which in effect completed the pattern. Throughout the 66-point advance, neither the major trendline nor any support line was violated. Of further interest is the fact that in May 1961. (Not shown) prices broke the trendline and the 107-support line and then continued to decline. By the end of the year, most of the advances from the 70-breakout hail had been completely retraced. (When the reader finishes this book, a close re-analysis of this chart will show up other formations not outlined nor covered through this Chapter-a Measured Move, a Wedge, and a Head & Shoulders failure.)

The first top made in March was the culmination of an advance from 33 in December. The rally back to the high in April was on light volume, which did not augur well for a breakthrough into new high ground. As the level of the first top (54 ) was approached, volume increased and the advance was thrown back. Evidently, the supply of stock for sale at that level was too much for the demand, and hence a Double Top was completed when the decline extended beyond the $45 level. Subsequently, prices retraced all the ground won in the previous advance. The Downtrend channel is outlined; attention is directed to the trendline-breaking rally in October and the magnetic pull-back to the trendline, an effect described in Chapter 2. Also notice that resistance levels established during the decline were never violated.

The Double Top that formed in May and June is especially interesting because right after it was completed, prices formed what appeared to be a Double Bottom. The rally from this unusual counter-balancing formation challenged the Double Top but fell short, and the interrupted decline from the highs was renewed. Analysis of both of these formations should consider that the valid Double Top took shape after a long advance, and the completion of the top also broke a major uptrend line. Volume was heavy on the first top and light on the second top. The second formation—the potential double bottom took shape at a very unlikely level for a Double Bottom. Volume was light on both bottoms and the subsequent rally did not violate any other significant chart point. This Double Top would have caused the chartist some anxious moments, but eventually proved to have been a valid signal, (By February 1962, the price of this stock was under 29.)

It was difficult—but not impossible—to identify this Double Bottom formation before prices in November rallied over the October highs (B) to complete the pattern. The second bottom (C) was more than a point lower than the first (A), and this could have caused uncertainty. In a great majority of Double Bottoms, the second bottom is slightly higher than the first, but quite a few behave like this one. As noted in this chapter, "Heavy volume around one or both peaks or lows (in the case of bottoms) tends to confirm the development of a Double Top or Bottom.” This was the first clue. The second clue was the rally in the first week of November which broke the downtrend line drawn along the previous highs. Then, of course, the continuing rally above B completed the bottom. Since the rally from C carried well above the level of B, we regard the reaction to that level as a return move.

On March 21, Lionel reached an all-time high of 35   but closed below the previous close marking a Reversal Day (see Chapter 11). Six trading days later, prices touched a new high of 35 , only  above the Reversal Day high. Four weeks later, the third attempt at a new high was stopped at 35 . Each high was made on unusually high volume and the net effect was a Triple Top. The foregoing chapter indicated that Triple Tops were rare and have been classified as a variation of the common Double Top. In fact, the first two tops looked like a clear Double Top, and the chartist who followed this pattern would have been shaken when he saw prices rally for a third attempt at new highs. He would have had to hold his ground unless the third rally were successful in overcoming the previous highs. The ensuing downtrend followed a trendline fairly closely until October.

The du Pont chart above is the second illustration of how weekly, high, low, and close charts form the same kind of patterns as the daily charts. The Double Bottom that formed in late I960 reversed a decline of approximately 100 points, or $100 a share. (This may be a little shocking to those of the ''uninitiated public” who never understand how a "blue chip" can go down, and du Pont is the "bluest of the blue”.) At around 177, buying rallied the stock 20 points, and then prices declined all the way back to test the 177 level. Demand again increased just above the 177 level, and this next rally carried over the previous rally high, thus completing a Double Bottom reversal. A glance at the 1959 top will reveal an outlined Head & Shoulders Top (with only the return move to the neckline missing). Both the price and volume patterns were typical and this chart could have appeared as an illustration in the preceding chapter.