A very reliable and common trend reversal chart formation is the double top. As the name clearly and succinctly describes, this pattern consists of two tops (peaks) of approximately equal heights. A parallel line is drawn against a resistance line that connects the two tops.
We should think of this line as identical to the head-and-shoulders's neckline. As a resistance line, it is broken at point A. It turns into a strong support for price level at C, but eventually fails at point E.
The support line turns into a strong resistance line, which holds the market backlash at point F. The price objective is at level G, which is the average height of the double top formation, measured from point E.
Signals Provided by the Double Top Formation
The double top formation provides information on:
1. The support line, set between points A and E.
2. The resistance line, set between points В and D.
3. The price direction. If the neckline holds the buying pressure at
point F, then the formation provides information regarding the price direction: diametrically opposed to the direction of the peaks (bearish).
4. The price target, provided by the confirmation of the formation (by breaking through the neckline under heavy trading volume).
Exactly as in the case of the head-and-shoulders pattern, a vital requirement for the successful completion of the double-top formation is that the breakout through the neckline occurs under heavy market volume.
Again, please remember that gauging volume in traditional ways is only possible in the currency futures market. Therefore, the trader must estimate the size of the cash market volume by extrapolating from the currency futures' volume and the trading "noise." A breakout on light volume is a strong case for a false breakout, which would trigger a sharp backlash in the currency price. The time frame for this chart formation's evolution is anywhere from several weeks to several months.
The intraday chart formations are less reliable. There is a strong correlation between the length of time to develop the pattern and the significance of the formation. The target is unlikely to be reached in a very short time frame. There is no direct suggestion regarding the length of target reaching time; but foreign exchange common sense links it to the duration of development.
It is important to measure the target from the point where the neckline was broken. Avoid the trap of measuring the target price from the middle of the formation under the neckline. This may happen as you measure the average height of the formation.
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