Analysts vary in their specific definitions of a Double Top. According to some, after the first top is formed, a reaction of at least 10% should follow. That decline is measured from high to low. The second rally back to the previous high (plus or minus 3%) should be on lower volume than the first. Other analysts maintain that the decline registered between the two tops should be at least 20% and the peaks should be spaced at least a month apart.
The pattern is comprised of two distinct tops that appear near the same price level. Tops will have a significant amount of time between them - ranging from a few weeks to a year.
Generally, volume in a Double Top is usually higher on the left top than the right. Volume tends to be downward as the pattern forms. Volume does, however, pick up as the pattern hits its peaks. Volume increases again when the pattern completes, breaking through the confirmation point.
Important Characteristics Following are important characteristics for a Double Top.
- Uptrend Preceding Double Top
The Double Top is a reversal formation. It begins with prices in an uptrend. The trend upwards should be fairly long and healthy.
Analysts pay close attention to the "size" of the pattern - the duration of the interval between the two tops. Generally, the longer the time between the two tops, the more important the pattern is as a good reversal signal. It is not unusual for a few months to pass between the dates of the two tops.
The deeper the trough between the two tops, the better the performance of the pattern.
Volume tends to be heaviest during the first peak and lighter on the second. It is common to see volume pick up again at the time of breakout.
A pullback after the breakout is usual for a Double Top. The higher the volume on the breakout, the higher the likelihood is for a pullback.
- Two Peaks at Different Levels
Sometimes the two peaks comprising a Double Top are not at exactly the same price level. This does not necessarily render the pattern invalid. Some analysts point out that investors should be less concerned if the second peak does not hit the high of the first peak.
Trading Considerations Consider the duration of the pattern and its relationship to your trading time horizons. The duration of the pattern is considered to be an indicator of the duration of the influence of this pattern. The longer the pattern the longer it will take for the price to move to its expected target. The shorter the pattern the sooner the price will move to its target. If you are considering a short-term trading opportunity, look for a pattern with a short duration. If you are considering a longer-term trading opportunity, look for a pattern with a longer duration.
The target price provides an important indication about the potential price move that this pattern suggests. Consider whether the target price for this pattern is sufficient to provide adequate returns after your costs (such as commissions) have been taken into account. A good rule of thumb is that the target price must indicate a potential return of greater than 5% before a pattern should be considered useful. However you must consider the current price and the volume of shares you intend to trade. Also, check that the target price has not already been achieved.
The inbound trend is an important characteristic of the pattern. A shallow inbound trend may indicate a period of consolidation before the price move indicated by the pattern begins. Look for an inbound trend that is longer than the duration of the pattern. A good rule of thumb is that the inbound trend should be at least two times the duration of the pattern.
Criteria that Support - Support and Resistance Lines
Look for a region of support or resistance around the target price. A region of price consolidation or a strong Support and Resistance Line at or around the target price is a strong indicator that the price will move to that point.
- Relationship of Pattern and Moving Average
The location of a Moving Average relative to the pattern can be a good indicator of the potential of the pattern. The Double Top should be above the Moving Average. For short duration patterns use a 50 day Moving Average, for longer patterns use a 200 day Moving Average.
The Moving Average should change direction within the pattern and should head in the direction indicated by the pattern. For short duration patterns use a 50 day Moving Average, for longer patterns use a 200 day Moving Average.
Volume is important for a Double Top. Two characteristics regarding volume should be noted. A strong volume spike on the day of the pattern confirmation is a strong indicator in support of the potential for this pattern. The volume spike should be significantly above the average of the volume for the duration of the pattern. In addition, the volume throughout the duration of the pattern should be declining on average.
Reversal Patterns (such as Bullish and Bearish Engulfing Lines and Islands) that occur at the peaks and valleys indicate strong resistance at those points. The presence of these patterns inside a Double Top is a strong indication in support of this pattern.
Criteria that Refute - No Volume Spike on Confirmation
The lack of a volume spike on the day of the pattern confirmation is an indication that this pattern may not be reliable. In addition, if the volume has remained constant, or was increasing, over the duration of the pattern, then this pattern should be considered less reliable.
- Relationship of Pattern and Moving Average
If the Double Top is below the Moving Average then this pattern should be considered less reliable. Compare the location of the pattern to a Moving Average of appropriate length. For short duration patterns use a 50 day Moving Average, for longer patterns use a 200 day Moving Average.
A Moving Average that is trending in the opposite direction to that indicated by the pattern is an indication that this pattern is less reliable. For short duration patterns use a 50 day Moving Average, for longer patterns use a 200 day Moving Average.
An inbound trend that is significantly shorter than the pattern duration is an indication that this pattern should be considered less reliable.
A Double Top occurs when prices are in an uptrend. Prices rise to a resistance level, retreat, and then return to the resistance level again before declining. A Double Top often forms in active markets, experiencing heavy trading. A stock's price heads up rapidly on high volume. Demand falls off and price falls, often remaining in a trough for weeks or months. A second run-up in the price occurs taking the price back up to the level achieved by the first top. This time volume is heavy but not as heavy as during the first run-up. Prices fall back a second time, unable to pierce the resistance level. These two sharp advances with relatively heavy volume have exhausted the buying power in the stock. Without that power behind it, the instrument reverses its upward movement and falls into a downward trend.
A pullback after the breakout is usual for a Double Top. The higher the volume on the breakout, the higher the likelihood is for a pullback. When everyone sells their shares soon after a breakout, what is left is an imbalance of buying demand (since the sellers have all sold), so the price rises and pulls back to the confirmation point. | 
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