Double Top pattern with Candlestick analysis
A Double top is a widely studied pattern in western technical analysis.
The way the pattern is formed is as follows:
The stock is ascending because of some news. It might be weeks before the investor perception towards the stock starts changing. The stock is generally overbought by this time as evidenced by stochastics. Profit-taking starts at this point and bears start smelling weakness. They try to take the stock down, but do not have enough force at this point. Bulls step in again forming the intermediate bottom. As the stock rallies and approaches the level where it had failed before, the bulls become indecisive. If they cannot muster enough force to break and close above the previous high, the bullish sentiment starts weakening. Shorts pile in and the effect of bulls selling out and short positons establishing, leads to a rapid sell off. The pattern is formed when when the right leg goes through the intermediate bottom.
Candlesticks can give the trader an edge over the competition. As the stock starts approaching the resistance point again after its initial failed rally, a trader can start noticing what signals are being formed. If a lot of Doji, Spinning Tops or any reversal patterns are noticed near the resistance area, it will give the trader the confidence to jump in the trade, with the knowledge that the stop loss point is very close to his point of entry. This will give the trader at least a couple of days of head start over the competition.
The following chart shows INDHOTEL.
Notice how the stock bounced off the same resistance level in January of this year. The first leg up was stopped by a Bearish Harami. The bears tried to take the stock down, but were unable to. The bulls stepped in and rallied the stock. However, they could not close over the recently established top. The Doji followed by a Bearish Engulfing signal was evidence that bullish sentiment was weak and the bears took control. This was an excellent short entry. Two candlestick reversal signals occurring at the same level should be looked upon as a high probability situation.
Chart courtesy icharts.in