Understanding double top and bottom patterns

Double top and bottom patterns are formed from consecutive rounding tops and bottoms. These patterns are often used in conjunction with other indicators in technical charting.

Avdhut Bagkar, Business Standard
20th December

A double top pattern is formed from two consecutive rounding tops. The first rounding top forms an upside-down ‘U’ pattern. Rounding tops can often be an indicator for a bearish reversal, as they often occur after an extended bullish rally. If a double top occurs, the second rounded top will usually be slightly below the first rounded tops peak indicating resistance and exhaustion. Their formation suggests that investors are seeking to obtain final profits from a longer bullish trend.

Double bottom patterns, on the other hand, are essentially the opposite of double top patterns. A double bottom is formed following a single rounding bottom pattern which can also be the first sign of a potential reversal. Rounding bottom patterns will typically occur at the end of an extended bearish trend. After a double bottom, common trading strategies include long positions that will profit from a rising security price.

Here are three stocks that formed a double top and double bottom pattern on the technical charts in the past few weeks:

  • Bajaj Finance Ltd (BAJFINANCE): Recently, this counter has shown a reversal from two distinct levels – Rs 3,886 and Rs 3,880 – as per the daily chart. This reversal indicates “Double bottom” pattern, which crossed the break-out neckline at Rs 4,040 decisively. Normally, the breakout candles needs to have higher volumes, which is true in this case.
  • Godrej Consumer Products Ltd (GODREJCP): After forming higher tops at Rs 760.20 and Rs 761.70 levels in the past few weeks on the daily chart, the counter has witnessed massive selling pressure. A “Double Top” formation with a neckline at Rs 710 was broken decisively. However, the counter made efforts to rebound, which failed to absorb the selling pressure.
  • Wipro Ltd (WIPRO): A closer look at the daily chart of this information technology (IT) major reveals a “Double Bottom” formation on closing a basis with a breakout at Rs 244 levels. The Moving Average Convergence Divergence (MACD) has made a positive crossover and is heading towards the signal line. The Relative Strength Index (RSI) is trading around 50 value, away from overbought condition of 70.

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