Chart Patterns Part 3

● Double Top Patterns

Double tops are the same as double bottoms, but are regarded as bearish reversal patterns instead of bullish.

In figure 2.9 below, BJ Services Co. (BJS) was in an up trend from around September 1995 until October 1997. The trend reversal is confirmed by the second top which occurred around April 1998. From April 1998, a downtrend persists until around October of the same year.

Helpful Hints:

1. Double tops are also sometimes called “M” patterns because of the downswing between the two tops, like in the chart above.
2. The tops or bottoms don’t have to be at the exact same level. As in the chart above, an approximation is fine.
3. Two isn’t a magic number. There can be double, triple, even quadruple top/bottom patterns. The more tops or bottoms that form, the stronger the pattern is.

● Head and Shoulders Patterns

Like the double top/bottom patterns, the head and shoulders pattern is also a reversal pattern. The head and shoulders pattern is quite well known probably because William Buckley popularized it in his publication, Investor’s Business Daily.

In the case above, the head and shoulders pattern had completely formed by late November 1998. When the price broke below the baseline at the end of November, it was an extremely bearish sign, and the price subsequently broke down.

With all head and shoulder patterns, the moment of potential reversal is when the price breaks through the baseline.

Helpful Hint: The more complex the pattern, the more subjective it can be to identify it. Such is the case with head and shoulders patterns. Some have attempted to assign precise rules to them while others are more lax. Ultimately you will have to decide on your own particular criteria for identifying head and shoulders patterns. Just remember to keep in mind the basic four parts, and you should be fine.

Chart Patterns Part 1 | Chart Patterns Part 2