What is a Double Top Point and Figure breakout?
The P&F Double Top breakout is bullish. The pattern involves a rising column of Xs, exceeding a prior column of Xs, by one box, the breakout. The Double Top is uncomplicated yet highly effective. The pattern confirms a reassertion of the stock's up trend. Double Tops are a trader's bread-and-butter buy signal during a bull market.
Double Top buy signals are a frequent daily occurrence, across the stock market, during a bull phase. In the right climate, an investor could comfortably rise these signals alone. On a typical bull market session, using end of day closing prices, expect to count at least a dozen of these buy signals among constituents of the S&P 500.
Psychology of the Double Top breakout pattern
A P&F Double Top breakout signal, beyond the prior column of Xs, triggers short-covering and fresh longs, by nature of the resistance break. Short traders that sold into the preceding down O column will typically place a stop just above resistance, the prior column of Xs. The break above the preceding X column activates short stop-loss orders. Simultaneously, longs enter on the upside breakout through fear of missing out on the uptrend reassertion. The buying frenzy, from covering shorts and fresh long positions, fuels the price extension higher.
How to Trade a P&F Double Top?
Following activation of a Point & Figure Double Top, further analysis of the chart is necessary, seeking out supporting evidence.
- The primary price trend for the stock or index must be up. In other words, trading must be above a bullish trendline. The price should not be in a prolonged period of congestion and certainly not in a bear market.
- If a Double Top appears following a counter-trend correction low, wait for additional confirmation from a subsequent bullish breakout.
- Look for other Double Top buy signals preceding the pattern. A series of prior bullish breakouts in the rising trend will add conviction, increasing the Double Top's chance of success.
- A bullish relative P&F chart is necessary. The relative chart should be trending up on a medium to long-term basis. The only time a weak relative chart would be considered is when it has found a long-term relative horizontal support level.
- Sentiment is also of value. If the pattern formed during a spell of bad news-flow, the signal's outcome will be more powerful. Short sellers on the news will need to cover and that will fuel the rally further.
Entry is best sought a few days following the Double Top. Following a breakout, the price typically pauses to catch its breath for a few sessions, retreating slightly.
In a bull market, where the price has a well established uptrend, above rising trendline support, the Point & Figure Double Top is a fairly honest buy signal.
During a deep rangebound period, the signal is useful for forecasting range swings. However, caution is necessary, conviction, as determined by other factors, must be high.
In a bear market, the Double Top is prone to failure, leading to a Bull Trap. Consequently, the pattern is best avoided in this environment.
Where to position a stop-loss?
Initially one box beneath the prior column of Os.
Following pattern activation, as the uptrend gains momentum, the stop could be raised to the box under the next completed column of Os (a pull-back). A retreat of Os would be considered complete when a 3 box reversal prints back to the upside, thereby confirming that the primary trend is reasserting.
How to determine a price target?
A vertical count could be used to calculate an upside objective of the Double Top buy signal. Not the most appealing upside projection, depth wise, but they are fairly reliable.
Double Top Breakout Explained by Example
Consecutive Double Tops
The appearance of back-to-back Double Top breakouts is a good means to confirm a primary up trend reassertion. Preceding the pair of Double Top patterns would be a correction low, as illustrated here on the chart for Nova Measuring Instruments in September 2019. The 2017 through 2018 sideways correction terminated in October 2018 with a box fill at $21. After which, the uptrend resumed, printing the consecutive Double Top buy signals.
Double Top Durability
The P&F Double Top pattern is a simple pattern, yet powerful and effective. The example below illustrates how a Double Top buy signal can remain in effect for many years. The SPDR Consumer Discretionary ETF, the XLY, printed a relative ratio Double Top buy signal in August 2008. 11 years later, that signal is still in play!
Multiple Double Tops during a trend
The Kirkland Lake Gold P&F relative chart illustrates a series of Double Tops. As of September 2019, five consecutive breakouts are highlighted. This is a relative chart, the price of Kirkland relative to the NASDAQ 100. A rising trend on a relative ratio reflects outperformance, in this case over three years.
During an uptrend, it is common to observe a series of Point & Figure Double Tops, as illustrated above. The PayPal chart below is another good example, exhibiting four Double Tops in-a-row over the first half of 2019.
Over the first 8 months of 2019 Home Depot generated five Double Tops in-a-row! They carried the price to a new record high, pulling up from a sizeable correction into the end of 2018.
The Allied Motion Technologies chart shows a series of Double Tops over 2017 and 2018. In most cases the pattern signalled an upside reassertion of the trend. However, circled on the chart are failed Double Top breakouts. Often a failed breakout coincides with one way sentiment, good news in the case of a buy signal. Therefore, always good practice to research news stories, such as earnings, to determine the cause of a price surge.
Casella Waste Systems printed a series of uninterrupted Point and Figure Double Top breakouts off its 2014 low. That trend saw the price increase five-fold.