Aaron
Lynch
|
A question that often arises in discussion is what does and what doesn't constitute a double top or double bottom. In most cases it comes down to an understanding of charts and the harmony that a potential double top or bottom may have. Those who choose not to rely on harmony must have a technical reason. A plus or minus 2% tolerance will be a good guide for you. |
| In the NCM example below we can see a recent double top where the tops are $0.11 cents apart. This measured against the average price of the two tops gives us a figure less than 1%. So in this case we can suggest that this certainly fits into the category of a double top. |
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| Broadly speaking, we often see a strong reaction by markets when this pattern occurs. The perception in the market in the case of a double top is that there is not enough strength present if a new high cannot be achieved. Those students working with David Bowden's Number One Trading Plan would be familiar with the idea of a market reacting up to 200% based on the range between the double tops. In the case of the current move NCM has come back close to 175% so not the full amount but relatively close to that.
I have also included some extra milestone theory for this double top formation. I often add some thoughts on milestones to my articles to highlight the relevance and importance of this analysis. In the chart below, taking a wider view on NCM, we see that the double top price points have also lined up with the 75% milestone of the previous 3 day swing range. I identified this specific range by using a 3 day swing overlay (in purple), as the ranges in the move up from Jun 2003 were quite small on the 1 day swing. |
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| Now that we have determined the double top formation and the presence of the supporting milestone we can start to look with confidence at the first ABC short trade. The market confirmed this on the 15th Jan and entry was signaled at $12.53 with safe exit being available at $11.11 for this short trade. A potential profit of $1.42 per share. Consider that NCM also has options and share futures, so an understanding of leveraged tools may have seen your profit potential as a return on investment even higher. |
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| After exit was taken on the 19th of Jan another ABC short trade was signalled 2 days later on the 21st with entry confirmed on the 27th. This trade using standard stop rules would have been managed to exit just above the 50% milestone.
Another observation that could be formed regarding the two areas circled in orange is that a double bottom may have formed. The price action has moved steeply away from these points so the potential for the first ABC Long trade may not be far away. It is also advisable to scan back over the price history to see if there are any other areas that may also maintain the idea of support at this level, creating perhaps a triple bottom. The crosshair tool is particularly useful for this. |
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| Ultimately, when making trading decisions that involve double top and bottom patterns, it is important to have other factors supporting the decision and the safest trade to take is the first ABC trade from that double top or bottom. Understand that market movement can be rapid around these points so being set early for them allows a better trading outcome. Studying the data in your chosen market will help you recognize where potential points like these will come in.
Good Trading
Aaron Lynch |