Hi everyone.
Welcome back to this wealthy education course on technical analysis.
Today we're going to be talking about reversal patterns and specifically the double top and the double
bottom a double top is when a stock trades up to resistance level two times in a relatively short time
frame and a double bottom is when a stock trades down to a support level two times in a relatively short
time frame.
As you can see from the graph on the left we have the stock in an up trend it moves up to a resistance
level.
Has a pull back to pull back low moved up a second time to the resistance level and then pulls back
and Dives lower than the first pullback low.
So basically with a double top you have sort of an EM pattern and with a double bottom you're going
to have a W patter and when the stock breaks out of the pattern as it does here on the right side of
this graph and moves lower that is your signal to either sell the stock if you're long or go short the
stock.
The psychology behind the double top is that the stock has traded up to resistance and has failed to
penetrate higher.
So the bulls have started to lose control.
The stock hasn't pulled back and instead of rising and going through resistance the second time which
would confirm the bullish pattern the stock peters out at the top a second time showing that the Bears
are now in control of the stock and then the completion of the pattern.
When the stock drops lower than the first pullback and they can't say reversal in the bullish trend
and that the Bears are now in control of the stock and the same is true for the double bottom with the
psychology being that the stock that has been in a downtrend is now reversing course because it has
failed to break through a support level two times in a row.
And now the bulls are taking control as they take it higher than the pullback high reached and the double
bottom pattern.
Let's see what this looks like on the chart.
Let's take a look at a double top and the chart of Advanced Micro Devices or HMD.
We have the stock in a clear uptrend moving up here.
We have a pullback in the stock
and then another attempt to get through a resistance level the high that has been set by the stock previously
and then moved down in the stock as it breaks through this level right around 31.
That's the point where we want to go short the stock so you can see we have the same pattern as the
bulls are in control.
They lose control and the stock pulls back.
But if the stock were to continue higher here in late September and break above this resistance level
then the bowl move would still be intact but the stock doesn't it pulls back.
Now if it were to hold the support level now and move higher it would still be a buy and still be in
the bull pattern.
But the stock breaks through here in late September.
To the downside now when the stock breaks to the downside that's what we want to either sell our long
position that we've held during this bull run or we may want to go short the stock as it completes the
double top pattern.
So that's a double top and HMD reversing a bullish pattern with the stock now and a bear trend now like
a double bottom and the stock of Intel the stock is in a bearish trend and makes a bottom here right
around the 33 and a half level.
The stock bounces higher.
The W.M. pattern do not have to be perfect.
The stock then comes back retest the low for a second time and then finally moves higher goes through
the pullback.
Hi continues higher at this point.
That we would have either cover short positions we may have had in the stock or go long the stock as
it completes the double bottom pattern and moves higher to the upside.
So that's a double bottom in the stock of Intel thank you for watching this video on the double top
and the double bottom reversal patterns and our next video we'll be talking about another type of reversal
pattern.
The head and shoulders pattern and the reverse head and shoulders pattern.
I look forward to seeing you in the next video.