Stop losing to professional traders in the stock market when double tops and double bottoms form. Keep reading to discover how you can make thousands of dollars when double tops and double bottoms form.
Every bull run in the stock market hits a level where longs start taking profits because the stock has run up too far too fast. When longs take profits, charts top out when the money from new longs is not enough to replace what was taken out.
Bulls who just bought in are mad as they came in too late. They are trapped. Their position continues to pile on losses. Should they hold on or sell for a loss? Only when enough bulls decide the stock has overreacted on the downside will they come in and buy. The rally will resume to the upside as more bulls rush in to buy on weakness. As prices approach the level of their old top, you can expect sell orders to hit the market.
There are always bruised and beaten warriors who got trapped in the previous sell off and take a blood oath to get out if the market ever gives them another chance.
An exact opposite situation happens in the stock market at a bottom. A stock falls to a new low at which enough shorts start taking profits by covering their positions which causes the market to rally. Once that short covering rally stalls and the stock begins falling again, all eyeballs are on that previous low-will it hold? If fear is greater than greed, prices will break below that previous low which will mark a continuation of the downtrend. If greed is stronger than fear, the downtrend will stop near the old low forming a double bottom. Your other technical indicators will help you figure out which of the two possibilities is more likely to occur.
Any time you see a stock rise to its previous peak, the main question in your mind should be will it rise to a new high or form a double top and turn down. Technical indicators like volume, MACD, RSI, and stochastics can be a great help in answering this question.
If a stock climbs to its previous high, if the volume, MACD, and stochastics are dropping then a double top is likely to form.
Whenever a stock falls to its previous low, it is likely a double bottom will form if the volume and MACD start climbing.