Double Top
Definition
A double top is a bearish reversal pattern that forms when price advances to a high, pulls back, then rallies again to approximately the same high but fails to break through — showing that sellers are defending the level twice.
Example
“The stock hit $62 in January, pulled back to $55, recovered to $61.80 in March, and failed. The double top triggered when it broke below $55 — the 'neckline' — and the measured move took it all the way to $48.”
Detailed Explanation
The pattern captures the exhaustion of a bullish trend. The first top shows strong buyers pushing price to a new high. The subsequent pullback indicates selling pressure or profit-taking. The second rally toward the same high is a test — if buyers can't exceed the prior high, it signals that supply at that level is overwhelming demand. The sellers are still there, still defending. When price then breaks below the pullback low (the neckline), it confirms that buyers have completely lost control.
What makes a double top more reliable versus just two similar highs is the volume signature. The second top should come in on lower volume than the first — this shows that the rally is losing conviction, that fewer buyers are participating at the highs. If both tops have identical, strong volume, the pattern is less reliable. And if price at the second top shows a significant momentum divergence (like RSI making a lower high while price makes an equal high), that adds further weight to the bearish case.
The measured move target is calculated by taking the height from the neckline to the top and subtracting it from the neckline breakdown point. So if tops are at $62, neckline is at $55, and height is $7 — the target is $48. In practice, many traders enter on the neckline break and set stops above the second top. False breakdowns of the neckline are common, especially in overall bull markets, so some traders wait for a retest of the broken neckline (now resistance) before entering short.