Tops and bottoms are formed when a stock Peaks out in either direction. Tops and bottoms take quite some time to form. One of the main reason being, nobody really knows when to call it quits. Many people just keep chasing a stock, again, in either direction.
Double and Triple tops/bottoms are formed as a result of stock trying to touch and retest previous highs and lows respectively. These highs/lows are always considered a mental roadblock. And hence, every move near these levels is considered a bearish sign and investors/traders get nervous and one notices either buying or selling as the case may be.
Let us consider SBI(State bank of India) from the Indian markets to show what these Tops and Bottoms are. This is a "Picture Perfect" example on all fronts. And it not only shows double, but also Triple Tops and Bottoms. Let us dissect the chart.
Late Nov 2005 : SBI tried to break past the upper 940's, but failed. It corrected for a few sessions, until early December. Which is when it started to climb up again. Mid December 2005 : A perfect example of a double top. Once again SBI tried to pass the 940+ and failed. Traders got nervous and this prompted heavy selling. If you closely look at the volume, it was definitely heavier than normal around this time which confirms the selling and nervousness.
Early Jan 2006 : This completes the trio, a Triple top. This was the third time that SBI tried to move past the upper 940's and failed. This is where you should have sold your Long positions. Stock corrected nearly 9% from this point on.
Early Feb 2006 : Another perfect example of a double bottom, this time. As you can clearly see, once SBI started to correct since early Jan, it ended the downtrend at "exactly" the same level/point where it did earlier, around the 860's. Why did it stop here? Because, this is where it started to bounce back the first time(around late Dec 2005) and investors/traders thought this as a good buying opportunity, which it was.
Late Feb 2006 : Again, an excellent example of a Triple bottom. SBI came back to the levels where it found support the previous two times. This completed the third leg of downtrend. In fact, this would have been a definite buying opportunity.
Mid March 2006 : As you can see, this time SBI broke the 940 level with a bang. Guess what? Volume. Volume was more than 3 times the normal volume as SBI took away the 940's and marched ahead. A clear 13%+ profit in just 2+ weeks from the day it formed the triple bottom.
So, to sum up. Double and Triple tops/bottoms, if identified early enough and correctly can give great returns in a very short time.
Earlier Articles:
Technical Analysis & Decision Making . . . . Support/Resistance Level and It's importance . . . . Trading System . . . . Fibonacci Retracements And How to Benefit From It . . . . BreaOuts & BreakDowns of Stocks . . . . MACD Indicators . . . . Volume & It's Importance . . . . Crossovers-Bullish & Bearish . . . . Stoploss-What to do . . . . Trading With Grudge
Source: stocks.dlngroup.com
