The Master Swing Trader: Double top pattern

I think this topic may be timely now.

We may wish to look for tops in either stocks, sectors or markets after our little pullback, and before we break through our previous top. I know Mannwich has said the top is in, but Farley says we often get inversion points revisited and tested. Right now, with the Fed still buying, we may go up for awhile. Let’s see if we can use Farley’s top definition.

Farley is a little inconsistent in his definitions of topping. He says that a top is a single event, and conversely, a bottom is a process. As we all know, Dss says that a top is a process, and the top may not be clarified for some months after the event.

I believe Dss.

Here is a pattern which Farley identifies as a Double Top (which clearly shows it s a process, so maybe Farley’s editor missed the section or he didn’t have one)



Things to know about this pattern not on the chart are:
1. The SPY was retreating, the 3LB was in a clear downtrend.
2. The average volume for TEX was 2.2Million, and on the two days that were down throwing it out of the up channel were about 1.2 million. Very light volume, almost 50% of the average. That means there may be no commitment to the price action.

Commenting on the chart:
The tops are almost exactly at the same price point.

The Stochastics are overbought with a clear trough in between the tops.

A W pattern was not formed, because the stochs never returned to the overbought conditionl This reinforces this pattern is likely to be an "M"

The relative strength is falling. That is, this stock is weaker than the market.

There is likely a strong support point at around 32.40.

It’s hard to tell from the screen capture, but the stochs’s %K and %D have crossed over.

IMHO, this is a classic double-top.

To test this we should establish a position with a stop-loss.



We establish the position just as it falls out of it's up-channel, and confirms a downward price direction. Now we follow it. As it moves in our direction, we may add to the short position. And we may move our stop higher. We would do this because as the stock establishes a down-channel, we aren’t sure where the top of the channel is. What I do is reduce my position if the stock moves against me, and add when it moves in my direction until it gets beyond my stop limit, then I just move to a trailing stop. Let's see what happened:



TEX has established a clear down-channel. The stochs have turned over and are headed south. Relative strength has fallen. Now we have to be careful to make sure TEX doesn't violate the down-channel, so we might set our stop at 37.41, above the channel. Or, we might take some shares off as it moves upward in the channel, adding when it turns around.