Double Tops/Bottoms and Triangle Patterns

Double Top/Double Bottom


Bearish double top for Talivaara shares
These patterns are easy to find and trade and are an indication that a trend is about to reverse. A double top forms when a share price struggles to exceed a particular price level on either an intra-day basis or closing-day basis. The result is that the share price tops at the same level twice and retreats as sellers take hold. Double tops are therefore bearish patterns that are highly reliable. A word of caution though, for the pattern to be valid, the two tops should have at least a 7 day gap in between.  For Talvivaara shares, a double top formed in January 2011 when the shares failed to break the level over 600p for the second time. The result is that sellers took hold and a double top was formed. To make matters worse, a bearish head and shoulders formation was also present making the decline steep once the neckline was broken.


Bullish double bottom for Halfords shares
Double bottoms are when a share price stops at a share price twice and then rises back up indicating good support at that particular level. Thus it is a bullish pattern. This is shown for Halfords shares in 2012. The shares bottomed at just below 200p twice on a fairly short-term timescale - there was a 7 day + gap though making the formation valid. The result was a sharp rise back up following the realisation that the pattern was valid. To improve success rates for short-term double bottoms, you should wait for the island in the middle to be broken above. In this case the island has a maximum just above 200. Waiting for the share price to exceed this again would be a good idea. Rather than just picking a double bottom I chose Halfords as once again is has an IH&S pattern within it. Once the neckline is broken, a buy signal is generated. For cautious traders you would wait for the shoulder base line to be breached. Buying shares following a double bottom is likely to reap greater rewards if there is a steep decline beforehand.

One final point - the points that form the double top/bottom don't have to be sharp spikes. They can be curved, long-term support forms. Furthermore, the price does not have to top and bottom at exactly the same share price, but if the disparity between the two is greater than a couple of percent then it is probably invalid.


Ascending/Symmetrical/Descending Triangles

Ascending triangle for BP shares

Triangles are a relatively common share price pattern and they can come in a variety of time lengths. Ascending and descending triangles are right-angled in nature. They involve horizontal resistance and support respectively with the other line sloping upwards and downward respectively. The result is that the two lines eventually 'pinch-out' as the share price trading range becomes smaller and smaller. Usually a breakout will occur upwards and downwards respectively. A very-long term ascending triangle is currently still being formed for BP shares. Since the Gulf of Mexico Oil Spill in 2010, the shares trading range has slowly tightened. The horizontal resistance is also round-number resistance at 500p with the upward sloping support running from the lows of 300 to around 450 currently. To trade this pattern, you would set a stop loss a few percent below the rising support and look for an eventual breakout past 500p perhaps to as high as 600p. Placing a stop loss below the rising support ensures that losses are not too great considering any downside breakout would likely be steep with 400p being a subsequent short-term target. You would sell the stock should the uptrend be broken through. A descending triangle is the same apart from the formation is flipped and thus the share price is likely to break below the horizontal support.

Symmetrical triangle for Electrocomponents
The difference between these and a symmetrical triangle is that the symmetrical triangle does not have horizontal support/resistance, but rather has two sloping lines; one upward (support) and one downward (resistance). A long-term example is for Electrocomponents shares. Within the triangle there is also a H&S formation with a rising neckline that has created long-run support. For this example, the buy signal is generated upon the breakout in late 2012. Symmetrical triangles can be both bullish and bearish so waiting for a breakout is essential.