A double top is a chart pattern in which a stock trends into a price peak, corrects lower and then moves back to nearly the same level as the peak. If the stock then proceeds lower, moving below the prior correction low, a double top is in place. When this pattern occurs, it is a bearish signal for the stock; those that are long should be wary and those looking to get short can use this an opportunity to enter. The pattern needs to complete, though. A double top is not in place until the price breaks below the retracement low of the pattern. The stocks below are potential double tops, which means a trade signal has not been triggered yet. If the pattern does complete, look for these stocks move lower, in some cases significantly.
Home Depot (NYSE:HD) has been in a strong uptrend since putting in a 52-week low in August ($28.13). Since then, the stock has almost doubled, putting a 52-week at $53.28 recently on June 20. With the strong trend, it is possible this stock may just continue to push higher, but it also could turn into a double top. The recent high at $53.28 is close to the former price high of $52.88 from May 3. These peaks in close proximity create the potential for a double top. In the middle of May, the stock put in a low of $46.37. If the price once again retreats below that low, a double top will be confirmed. The price target if the double top completes is $39.46. The RSI indicator did not put in a new high when the price recently did; this bearish divergence indicates potential underlying weakness. On the other hand, if the stock rallies much above $53.28 the uptrend will remain intact and the potential for a double top will be nullified.
SEE:Momentum And The Relative Strength Index
Allstate (NYSE:ALL) has also been in a trend higher going back to September. In May, Allstate made a 52-week high at $34.99 (unadjusted), and has been unable to exceed that mark in the time since. Although, recently it came very close. Through much of June, the stock has hovered just below $35, creating the possibility of a double top. A retracement in the middle of the May took the stock down to a low of $32.42, before it bounced again. This is now the level to watch. If the stock moves back below this level, the double top is confirmed, and it signals a decline to $29.85. The RSI indicator is also showing bearish divergence in Allstate stock. Since March, the indicator has been edging lower while the stock price has advanced. If the stock breaks above $35, and can hold above it, the uptrend is likely to continue and the potential double top is negated.
Liberty Property Trust (NYSE:LRY) trended into a 52-week high on May 1 at $37.23, and on a recent rally has tested the level but has been unable to surpass it. On June 16 the property trust reached as high as $36.80 before pulling back again. The low between these two peaks is $33.43. If this low is penetrated, the double top will be in place. The downside price target, if that occurs, is $29.63. Once again, the RSI indicator is showing a bearish divergence with price, indicating there may be some underlying weakness in the stock. $37.23 is the current resistance area, if it is penetrated significantly, it signals an upside breakout, and the double top is nullified.
SEE:Support & Resistance Basics
Verisk Analytics (Nasdaq:VRSK) was trending higher from August till the end of April, but has since been moving in a more sideways fashion. The first peak of the potential double top was the 52-week high at $49.66 on April 27. The stock then corrected and put in a low of $45.85, before rallying again to a recent high of $49.25 (June 20). A potential double top is setting up, but will require a move back below $45.85 to confirm it. The downside price target if the pattern occurs is $42.04. Like the other stocks above, Verisk Analytics' price has also been diverging with the RSI; this has potentially bearish implications. On the other hand, if the stock can move above the 52-week high, and stay there, it will be an upside breakout and the potential for a double top will no longer exist.
SEE: The Anatomy Of Trading Breakouts
The Bottom Line
All four of these stocks have the potential to create double tops. Each has made a high, followed by a correction and the price has recently climbed back toward the prior peak. In order for the pattern to complete, though, the price must move back below the correction low. If it does, it signals a decline in price to the profit targets indicated. On the other hand, if the stocks rally back above the 52-week highs, the pattern is nullified. In this case, the stocks may be signaling an upside breakout and the continuation of the uptrend.
Charts courtesy of stockcharts.com
At the time of writing, Cory Mitchell did not own shares in any of the companies mentioned in this article.