Double top

The double top pattern is a main turnaround that evolves after a comprehensive uptrend and is defined by a rally to a new high, in that case a pullback and followed by a subsequent rally to a new high. As soon as the stock extends to the high, there is a supply overhang and demand falls away along with the share price. The share price retreats to test support levels.

Why does this occur?

The double top figure is played out moderately repeatedly. The general scenario is that more often than not buyers of the share pay too much due to the extended rally, at what time the stock price moves against them the investor stubbornly refuses to take a loss and exit the trade. The double top broadly occurs subsequent to a comprehensive rally to new highs. There is time and again widespread information with reference to the stock from analysts and on or after the media pushing the stock price higher (top 1), eventually the supply is overwhelmed by demand and the share price falls. The traders believe in their purchase as well as hold their positions not wanting to lose money or stubbornly, their pride. The price is in that case supported returning to its recent high (top 2). The first top usually has the experienced traders reducing their positions along with the opportunistic investors. In the main, the additional traders who hold their positions find the share price has fallen over a period of a few weeks supporting the “reaction low”. The stock stabilizes as well as at times receives some good media attention; buy recommendations as of analysts or positive company announcements will drive the price back to its recent highs. Commonly the investor who bought in on the first new high sells at their original purchase price, the volume begins to slow. The second wave of investors is now holding the same positions as the first investor. The media along with analysts are back at the good news stories pumping the stock higher, strong volume causes the stock to rise once more. The investor who was exposed to losses on the first top closes out the trade. This leaves the new investor exposed as the second top climaxes forming come to peaks, the double top is formed. The scenario leaves two sets of investors equally disappointed and the sell off begin rapidly.

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Overnight Developments

• Global stocks are lower with the European Euro Stoxx 50 Index down -0.67% and Sep S&Ps down 6.60 points (-0.61%). The markets remain concerned about the European economy with Greek credit default swaps today rising 27 bp to a record high of 959 bp, indicating that the markets are increasingly concerned about a Greek debt default. Meanwhile, the Greek 10-year bond spread against Germany rose by 10 bp to a 1-1/2 month high of 782 bp. Global stocks are also lower on yesterday’s news that US May new home sales plunged by 33%. On the brighter side, April Eurozone industrial orders today rose by +0.9% m/m, adding to March’s +5.1% surge and marking the third consecutive monthly increase. The report boosted hopes for a continuance in the surge in European exports tied to the recent depreciation of the euro.
• The Asian markets today closed mostly lower: Japan +0.05%, Hong Kong -0.59%, China -0.04%, Taiwan +0.10%, Australia -0.14%, Singapore -0.82%, South Korea +0.82%, and Bombay -0.14%. Taiwan’s central bank today unexpectedly raised its key policy rate to 1.375% from 1.25%, as opposed to the unanimous market consensus that the bank would leave rates unchanged. Taiwan’s Q1 GDP soared by 13.3% and the government last month hiked its 2010 GDP forecast to +6.14% from +4.72% and its 2010 inflation forecast to +1.4% from +1.27%. Adding to the news of tighter policy in Asia, South Korea’s Finance Ministry today said that South Korea will “normalize” its accommodative policies and take pre-emptive action against inflation due to stronger-than-expected economic growth. The Finance Ministry raised its forecast for South Korean 2010 GDP to +5.8% from +5.0%.

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