As of 11/20/2019
  Indus: 27,821 -112.93 -0.4%  
  Trans: 10,695 -152.59 -1.4%  
  Utils: 855 +6.70 +0.8%  
  Nasdaq: 8,527 -43.93 -0.5%  
  S&P 500: 3,108 -11.72 -0.4%  
YTD
 +19.3%  
 +16.6%  
 +19.9%  
 +28.5%  
 +24.0%  
  Targets    Overview: 11/14/2019  
  Up arrow28,200 or 27,100 by 12/01/2019
  Up arrow11,400 or 10,600 by 12/01/2019
  Up arrow870 or 800 by 12/01/2019
  Up arrow8,700 or 8,200 by 12/01/2019
  Up arrow3,200 or 3,025 by 12/01/2019
As of 11/20/2019
  Indus: 27,821 -112.93 -0.4%  
  Trans: 10,695 -152.59 -1.4%  
  Utils: 855 +6.70 +0.8%  
  Nasdaq: 8,527 -43.93 -0.5%  
  S&P 500: 3,108 -11.72 -0.4%  
YTD
 +19.3%  
 +16.6%  
 +19.9%  
 +28.5%  
 +24.0%  
  Targets    Overview: 11/14/2019  
  Up arrow28,200 or 27,100 by 12/01/2019
  Up arrow11,400 or 10,600 by 12/01/2019
  Up arrow870 or 800 by 12/01/2019
  Up arrow8,700 or 8,200 by 12/01/2019
  Up arrow3,200 or 3,025 by 12/01/2019

Bulkowski's Busted Double Tops

 

Information on busted chart patterns is discussed in my book, Visual Guide to Chart PatternsVisual Guide to Chart Patterns book.. You can find information in the book in Chapter 22: "Busted Pattern Buy Setups" (starting on page 229) and in Chapter 25, "Busted Pattern Sell Signals" starting on page 271.

If you click on the above link and then buy the book (or anything) while at Amazon.com, the referral will help support this site. Thanks.

-- Tom Bulkowski

$ $ $

Busted Double Tops: Summary

Busted double tops are double tops in which price breaks out downward and drops less than 10%, turns around, and then closes above the top of the double top. The following move in the busted direction (upward) averages 38% and the median gain is 31% (both numbers are for single busted patterns only), or a 19% median gain for all busted double tops.

Busted Double Tops: Single Busts

Picture of Amazon.com (AMZN) on the daily scale.

Busted double tops come in three varieties: single busts, double busts, and three or more busts.

Single busted double tops look like the chart on the right. Price forms a double top at AB which confirms as a valid double top when price closes below the chart pattern's low, which is at C. That occurs at D.

Notice that price doesn't drop far before recovering and closing above the top of the chart pattern, at E. A close above the top of the pattern busts the double top.

Not shown, but price continues rising more than 10% above the top blue line. For your viewing pleasure, I show horizontal blue lines that represent the highest peak and lowest valley in the chart pattern.

For a single bust, look for:

  1. Price must confirm the double top by closing below the bottom of the double top (that happens at D in this example).
  2. Price must drop less than 10% below the bottom of the double top (the difference between C and the low after D).
  3. Price rises and closes above the top of the double top (E).
  4. Price continues rising at least 10% before either closing below the bottom of the double top or dropping by more than 20% from a peak.

The last point, 4, means the ultimate high must be at least 10% above the top of the double top. If price fails to climb more than 10%, then it could be forming a double bust.

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Busted Double Tops: Double Busts

Picture of Sherwin-Williams (SHW) on the daily scale.

The chart of Sherwin-Williams (SHW), pictured on the daily scale, shows an example of a double busted double top.

Price forms a double top at AB, confirmed when price closes below the low between the two peaks at C. Price continues lower to D, which is less than 10% below the bottom blue line (which marks the lowest low in the chart pattern).

Price rises and eventually closes above the top blue line (the top of the chart pattern) at E. When that happens, it busts the double top for the first time. Notice that price does not rise much above the blue line (less than 10%) before reversing and dropping.

Price busts the double top a second time at F when it closes below the bottom blue line. Price continues lower, to G in this example, eventually dropping more than 10% below the bottom of the double top (not shown) and ending the search for busted turns.

For a double bust, look for these elements.

  1. Price must confirm the double top by closing below the bottom of the double top (below the blue line at C).
  2. Price must drop less than 10% (the move to D below the bottom blue line).
  3. Price rises and closes above the top of the double top (this happens at E).
  4. Price fails to rise at least 10% above the highest peak in the double top before reversing (the rise from the blue line to the peak at E).
  5. Price closes below the lowest valley in the double top a second time (point F).
  6. Price drops more than 10% below the bottom of the chart pattern.

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Busted Double Tops: Triple Busts

Picture of Aon (AON) on the daily scale.

Triple busts are rare, but the word triple is misleading. I counted every pattern that had three or more busts.

The chart of AON (AON) is an example of a multiple bust double top.

The double top occurs at AB. When price closes below the lowest low in the pattern at C, it confirms the double top. Price in this example drops to D, which is less than 10% below the bottom blue line (which shows the lowest low in the double top).

Price recovers and rises to E, which busts the chart patterns for the first time. Price does not rise more than 10% above the top blue line before reversing and dropping to F.

F closes below the bottom blue line and busts the double top for the second time. The drop to F is less than 10% below the bottom blue line before price reverses again and closes above the top of the double top at G.

At G, price busts the double top for a third time.

In this case, the busting continues when price climbs less than 10% above the top blue line before dropping to H, which is the next close below the bottom blue line. That busts the double top again.

For a triple (or more) busted double top, look for the following:

  1. Find a double busted pattern in which price, after the second bust, fails to drop more than 10% below the bottom of the double top. That is point F in the figure.
  2. Price rises and closes above the top of the double top (point G).
  3. Price must rise at least 10% above the top blue line to stop the busted count at three. If not, then additional down and up cycles (each less than 10% from the nearest blue line) may continue, busting the double top.

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Busted Double Tops: Methodology for Testing

I found 2,333 double tops in 945 stocks dating back as far as July 1991 to October 2011. Few stocks covered the entire period. All of the double tops I found manually either using a historical search or real time (looking at my stocks each day). The real time additions prevented any look ahead bias since I am not privy to future price movements.

I then used software to measure performance and flag busted chart patterns.

Gauging performance uses the same method as I used to catalog non-busted chart patterns. That is, the search for the new ultimate high or low proceeded as described in the glossary. Thus, the numbers reported in Results should be considered perfect trades.

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Busted Double Tops: Test Results

The following numbers are the results from perfect trades in bull markets, unless otherwise noted. Do not expect actual trading results to match those discussed below. Use the numbers only for comparison purposes with other chart patterns.

How often do double tops bust?

Of busted double tops, what is the frequency distribution?

If you trade a busted double top, there is a 70% probability that it will bust just once. Thus, 30% fail to show price rising by more than 10% above the top of the double top.

What is the average rise for single busted double tops? As measured from the top of the chart pattern to the ultimate high...

What is the rise from perfect trades after all busted double tops?

What is the failure rate of all busted double tops? The answer appears in the below table.

Failure Rate for Busted Double Tops
Failure rate:  5%  10%  15%  20%  25%  30%  35%  50%  75%  >75% 
Number of double tops:98854950372627554866
Percentage:18%16%9%9%7%5%5%10%9%12%
Cumulative:18%34%43%52%59%64%69%79%88%100%

For example, there were 98 busted double tops that failed to show price rising at least 5% above the top of the double top. Those represent 18% of all busted double tops. On a cumulative basis (a running total), they also represent 18% of all busted double tops.

The median rise of all busted double tops is 19%. You can find that by interpolating the 15% and 20% columns. Thus, half of all busted double tops will see price rise at least 19%.

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Busted Double Tops: Trading

Picture of Conns (CONN) on the daily scale.

I show a chart of Conns (CONN) on the daily scale.

An Adam & Adam double top appears at A and B, confirmed at D when the stock closed below the low at C.

Price did not drop far before climbing up to E and closing above the highest peak in the pattern. That busted the stock. A buy stop placed a penny above the price at A would work well in this situation.

Price continued its strong straight-line run upward until rounding over and peaking at F. If you did not take profits near that peak, they were surrendered to the market.

The move from E to F measured (9.98 - 6.92)/6.92 or 44%.

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Busted Double Tops: Entry Setup

As an entry setup, here are the rules for trading busted double tops.

  1. Find a confirmed double top.
  2. Price must not close lower than 10% below the bottom (lowest valley) of the double top.
  3. Place a buy stop a penny above the tallest peak in the chart pattern.
  4. Price rises and closes above the top (highest peak) of the double top. This confirms a busted double top.
  5. Place a stop loss order to sell if price closes below the bottom of the double top.
  6. Hold until the trend changes and then sell.

This entry setup can mean a large drop from the entry to the stop price, if things go wrong. Even if things go right, how do you detect a trend change to sell? If price climbs in a steady trend, then selling when price closes below a trendline often works well. Perhaps other bearish chart patterns will appear and signal the move from bull to bear. Or perhaps you wish to use indicators. Use whatever sell method works for you.

-- Thomas Bulkowski

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See Also

 

Support this site! Clicking any of the books (below) takes you to Amazon.com. If you buy ANYTHING while there, they pay for the referral.

My novels:      New                  Bumper's Story Head's Law

Chart Patterns: After the Buy Getting Started in Chart Patterns, Second Edition Trading Basics Fundamental Analysis and Position Trading Swing and Day Trading Visual Guide to Chart Patterns Encyclopedia of Candlestick Charts Encyclopedia of Chart Patterns 2nd Edition Trading Classic Chart Patterns

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