7 Ways to Tell a Stock Is Headed Down

Double-Top

A double-top is a reversal pattern that occurs when prices are in an uptrend. Sometimes called an “M formation” because of its shape, the double-top is one of the most common chart patterns. Because they seem to be so easy to identify, though, traders need to be careful.

A double-top consists of two well-defined, sharp peaks at approximately the same price level. Prices rise to a resistance level, retreat, and return to the resistance level again before declining. A double-top often forms in active markets that are experiencing heavy trading. A stock’s price heads up rapidly on high volume. Demand falls off and the price falls, often remaining in a trough for weeks or months.

An important note: A double-top is only complete when prices decline below the lowest low — the confirmation point — of the pattern.