Is This the (Double) Top?

by Daniel Carter

A “Double Top” is a chart pattern commonly used in Technical Analysis to identify a reversal to the downside. It is exactly as it sounds: two attempts to break above resistance that ultimately fail, triggering bullish investors/traders to capitulate.  Double Tops are significant because they signal a strong move lower in prices, either in the intermediate or long-term.

Although we cannot be certain yet, there is a possibility that the S&P 500 is currently forming a Double Top. And if you were trading during the last two stock market crashes, this may look familiar. As you can see from the chart below, the bursting of the dot com bubble started with a Double Top, as well as the Great Financial Crisis of 08-09. Are we now setting up for something similar?

There are still a few things we must observe to be more certain that we have an actionable chart pattern.

First, we need to see that the second top is accompanied by less volume than the first top. This would likely mean that investors/traders are losing confidence in the stock market’s ability to break out of resistance. And as you can see from the chart below, so far so good.

We also want to see volume accelerate when price begins to fall again. This would mean that the bearish investors/traders have entered the market and are driving prices lower. So, basically, we want to see a reversal in the volume trend at the same time we see a reversal in the price trend.

Finally, to be as near positive as possible that we are seeing a Double Top, we want to see price break the lows of the trough between the two tops. In this case, that would be about at the price of $2535. If price breaks this level, we would almost certainly be headed for a bear market.

It is my thesis that we are about a year away from the next economic downturn. This shouldn’t at all be shocking considering that we are now in the longest economic expansion in recorded history. Typically, stocks start to drop about a year before the recession hits the economy. If the recession really is a year away, the Double Top scenario would be even more probable

Of course, there are many different ways the stock market could play out. Keep an open mind and be willing to adapt your strategy quickly. And as always, before you make any significant changes to your portfolio, do plenty of your own research and/or consult a financial advisor.