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Topping Price Formation - Double Top

A double top is a frequently observed topping formation that occurs when a top is followed by a short-term downside and then a short-term upside that culminates with a second top. The second top reaches approximately the same price value as the first top and is followed by a significant downside.

Below is a double top chart of daily closes from Quandl for Big Lots (BIG). The blue horizontal line is the resistance level for the two tops. Note that the second top, labelled 2, consists of a secondary double top.

The red horizontal line connects the two bottoms and represents a support level.

Sometimes a double top will be followed by one or more tops to form a multiple top. But multiple tops are less frequent, so assume that a double top signals the beginning of a prolonged downside.

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