Double Tops and Trading the Drops

Hey there! My name is Nate Thomas and I write for WOLF Financial. If you enjoy learning about trading you might also enjoy my newsletter, A Trader’s Education, and more of my content on X @tradernatehere. Thanks for reading!

This service is for general informational and educational purposes only and is not intended to constitute legal, tax, accounting or investment advice. These are my opinions and observations only. I am not a financial advisor.

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Last week we looked at the Bullish Pennant Pattern and I pointed to VRTX as a stock that was poised to break out.

That is exactly what we got! Great trade if you got in and out quickly, but you definitely needed to move with speed.

Take those profits when they are presented or risk not having any to take at all in this market. Many big pops have faded and given up the gains.

It almost seems like a trend this year.

And while I have been focused on bullish set ups, it is just as important to be prepared to trade any downside that might be on the way.

The Fed has indicated that rates are remaining higher for longer which was not received very well as the S&P 500 and NASDAQ dropped 2.93% and 3.62% respectively.

Next week will be very interesting.

Friday on its own was not encouraging for the bulls either, with shares selling off to close out the day.

For these reasons, and more, this week’s focus will be about identifying bearish double topping patterns and finding the right entry point to trade the downside.

How to Trade a Double Top Pattern

First thing is first, you must identify the double top.

Luckily enough, this is pretty simple. Although you can get too specific or too detailed and miss an obvious opportunity,

A double top can take three different forms:

1. Twin Double Top: The second reversal occurs at nearly the identical price as the initial top.

2. Weak Double Top: The second reversal is at a lower high, close enough to be a legitimate attempt at the prior high.

3. Fake-Out Double Top: The second reversal is at a slightly higher price than the initial top, typically followed by a sharp decline.

Each of these patterns follow a climb to new price levels, sometimes extended, before rolling over and reversing trend.

If you are only looking for the “Twin Double Top” you are going to miss opportunities that in hindsight will seem obvious.

LOW is a great example of a “Weak Double Top” followed by a drop.

With the pattern identified, your next step is to take an optimal entry whenever possible.

You won’t always get a prime set up, but I prefer to wait for them and pass on the charts that run away before I can get in the trade.

With LOW, you can clearly see the double top pattern form and as they roll over you get your first opportunity to enter a short position.

However, this entry point does come with higher risk as both the buyers and sellers have incentive to make a big push to either invalidate the double top (buyers) or see it through (sellers).

The shares sell off in a single day from $230 to $220, and then continue lower which is a great trade if you got in before the selling accelerated.

There is almost always a second chance to get in and this is the set up I actually prefer.

When a double top is formed, there is a dip and bounce at or near a key support level. In the chart above, this level is $219.60.

Your second chance comes when there is a retest and rejection at this prior support level, which has now become resistance.

If you are trading options, this is an even more ideal spot because of the great pricing you will get if you enter just as shares are rejecting.

Looking again at the chart, LOW sold off quickly after rejecting at prior support and is likely headed all the way back to $204.23.

Just like last week’s Bullish Pennant Pattern or the Gap Fill strategy from the week before that, the key to utilizing these set ups is to keep things simple and remained disciplined.

Take a look at AMZN, is it forming a double top?

What about AAPL? Possibly a weak double top?

They are both worth keeping an eye on at the very least.

That’s it for this the double top pattern. Thanks for reading and have a great week of trading ahead!

-Nate