A Double Top Signals a Price Downside

A double top price pattern is followed by falling prices. The chart of daily closes from January 2, 2001 through May 17, 2005 for Caterpillar (CAT), a heavy equipment manufacturer, shows five double tops. The red line shows the downside after the second top of each double top formation.

Price declines after the second top of a double top can be severe as shown in the double top labeled 2 or modest as shown in the double top labeled 4.

Do not buy a stock that is on the downside following a double top. Wait until the stock turns to the next upside.