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Cardinal Reversal Patterns - At Tops
1. The Double Top
Consider a security or a futures contract that is in an uptrend. The price
reaches a point at which all of the buyers' demand is met, and the sellers,
whether traders taking profits or aggressive short sellers, enter the market
and overwhelm the buyers. That price level will become known as major resistance,
as the level establishes a point at which the supply is significantly greater
than the demand (point A).
Frequently, the volume of trading activity at this level will
increase dramatically. The inability of the market to sustain the uptrend
attracts further profit-taking; at that point, the market undergoes a corrective
phase (B). However, the fundamentals underlying the bull market
may not have reversed course as yet, and so, the news begins to turn positive
and the bullish trend reasserts itself.
But sitting on the sidelines are traders and investors recalling the
recent highs. They are quietly contemplating that if the opportunity to
sell at the highs that they saw before presents itself again, they will
take it.
As the market rallies back to major resistance, the sellers take this
opportunity to offer their shares to the last buyers of the bull market
(C). Once the latecomers have bought their shares, the market begins
to decline; the sellers have taken control after unloading their holdings.
Usually, this second test of major resistance will have noticeably less
volume than the first, as the buyers are few and the sellers are relieved
that they have made use of the second selling opportunity. Then, the market
declines and breaks below the lows established between the two peaks. This
signals to the technicians that the double top is complete (D).
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