Most amateurs get killed in the stock market when double bottoms and double tops form. In fact, after reading this article you will be able to get the revenge you deserve.
Every rally in the stock market reaches a point where enough bulls look at it and say”I’ve made a lot of money, and I might make even more money, but Id rather take my profits off the table. When longs take profits, charts top out when the money from new longs is not enough to replace what was taken out.
Bulls who just bought in are mad as they came in too late. They feel trapped. Their trading account keeps piling on losses. Should they hold or sell? Whenever enough bulls determine the stock has overshot to the downside, they will intervene and buy. As the rally resumes, more bulls come in. In real time prices advance to the point of their previous high, and that is where you should anticipate sell orders to reach the market.
There are always those traders who were trapped in the previous reversal and now they have sworn to their gods to jump out if the market would just give them another chance by rising to its old high.
A mirror image of this situation occurs in the stock market at market bottoms. A stock falls to a new low at which enough shorts start taking profits by covering their positions which causes the market to rally. Once that rally stalls out and prices start sinking again, all eyes are on the previous low-will it hold? If bears (fear) are stronger than bulls (greed), prices will fall below the previous low and the downward move will keep on going. If greed is stronger than fear, the downtrend will stop near the old low forming a double bottom. Use your other favorite indicators to decide which of these events is more likely to happen.
Any time you catch a stock ascend to its former top, the primary wonder in your head had better be will it climb to a new high or form a double top and decline. Your favorite technical indicators like the MACD, RSI, and volume will help you answer this question.
When a stock rises to its previous peak, a double top is most likely to form when the volume, MACD, RSI, and stochastics are falling.
Whenever a stock falls to its previous low, it is likely a double bottom will form if the volume and MACD start climbing.
For more helpful advice from master stock traders go to stock market trading tips and for great technical analysis and free stock picks visit stock market picks
