Double top, a popular formation, appears as a sort of "M" on a technical analysis chart.
In the Double Top formation, two peaks are formed. In a rising market, after a reaction, each new rally up appears to be making a Double Top. Many analysts often misread and misinterpret both the peaks. At the second peak, there is no confirmation pointing to Double Top and mostly the trend remains in force and prices simply move up to make new highs. Double Top is confirmed when prices fall down below the intervening valley.
The double top pattern shows demand outpacing supply (buyers predominate) up to the first top, causing prices to rise. The supply/demand situation then reverses; supply outpaces demand (sellers predominate), causing prices to fall. After a price "valley", buyers again predominate and prices rise. If traders see that prices are not pushing past their level at the first top, sellers may again prevail, lowering prices and causing a double top to form. It is generally regarded as a bearish sign if prices drop below their level at the earlier valley between the two tops.
Time between the two peaks is another determining factor for the validity of a Double Top. It should be taken as first element in this regard. If tops appear at the same level but are very close regarding the time, then there are ample chances that they are part of the consolidation and the trend will resume itself. Two peaks should be at least a month apart or they are considered to be part of the same consolidation.
Volume gives another clue in interpreting this formation. Price reaches the first peak on increased volume then falls down the valley with low volume. Another attempt on the rally up to the second peak should be on a lesser volume.
Double bottom
Double bottom, an equally popular formation, appears as a sort of "W" on a technical analysis chart.
Most of the rules that are associated with Double Top formation also apply to Double Bottom formation.
As far as volume is concerned, it should show a marked increase on the rally up while prices saucer-out the second bottom.
source: wikipedia
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