Have you guys ever wondered why double tops are formed and it's significance? Anyone of you know the psychology and rationale behind double top? Is it a good time to short when you see a double top? Does chart patterns always repeat itself? I am going to put a case study to uncover this myth today.
Big operators are smart far sighted people. They have all the necessary statistics, tools, analysis, non public information, etc to determine the future trend of the market. I am not concerned about how they managed to get this info because all their activity is recorded in the chart and their evidence can be traced. For the public, if we equipped ourselves with the correct chart reading skills, we would be able to detect those important turning points way before the market is about to have a rally or reaction, thereby having a trading edge over those who depends on tips, news or gut feeling. By understanding these important turning points, we would be able to determine how strong/weak the rally/reaction, how much further upside/downside and where are the profit target levels, just so that we won't miss levels where big operators are unloading and cashing in profits and the public is still buying.
See the noble chart. After the 2008-2009 financial downturn, the big operators had been heavily cashing in on the shares during the selling culmination period. They knew that prices were dirt cheap and it's time again where huge profits could be made. They had successfully managed to frighten the public into liquidating and prudently planning their buying campaign. Of course, they don't buy all at one go, instead constantly checking the market for selling activity to see if any overhanging supply still exist. If it still exist, then they would absorb those supply so that further up move could happen. If the selling is strong then it is not time for an up move yet, else the up move is almost imminent. Of course, if you know how to read the chart like i do, all these can all be detected and amazingly after some time, you could even read their minds and decipher their true campaign.
Once the overhanging supply was absorbed, they would start to bring out some noise so that the public would start noticing it. You will know this because it will suddenly appear in the Top 20 volume in whatever brokerage house's platform you use. Before this stage, most of the shares were already in the hands of the big operators. The rationale for inducing the public was just so that they public could assist to push the prices higher, creating more hyper activity and making them as a victim to purchase these shares at a higher price. By this time, prices are starting to soar day by day. Those who still believes that this is a bear market, lost money in the market during the downturn and those who perform fundamental analysis will not buy. They won't believe that a bull market is in the making. They will only buy when good news starts to set in, companies are starting to make profits, broker starting to send out buy recommendations, etc, by then prices had already risen for some while. I call those mid bulls, where they are buying at the middle price.
Next few months passed and prices continue to soar. Those who had not bought cannot withstand prices were constantly moving up and started to buy, by that more activity was created. I call these people late bulls. During this period of time, everyone would be talking about the market's constant rising prices, news would be so rosy, companies are beating estimates, fortunes are made, etc..Of course, money could still be made during this period, however greed and fear also sets in. The public was hoping that the prices they got could rise non-stop until its time "they" think it's enough to take profits. During this whole process, big operators were quietly unloading and cashing in profits, however there were no signs of short sell yet. Do you think that the public will start taking profit if they got the share at $1 and it's now $1.50? I bet you 80% of the time, they won't be taking. As mentioned, the big operators are smart people and they could read the public's mind and so they were planning to slaughter the public big time. Not only they could trick the public into liquidating their current holdings, frightening them, make them lose confidence on the stock, but more importantly creating a false sense that a bear market is coming but hiding their true campaign that a bear is INDEED coming. And so prices start to decline slowly at first and sharply later on. On the first phase of slow decline, the public psychology was they hoped and prayed that the stock could move back up so that a little profits could be made or they could minimize their losses. The market was forgiving and gave them a chance, but trust me again, 80% of the time, the public would be thinking "come on, move up a little more, just a little more i would take profit/cut loss" and so they hung on and did not follow their trading plan. Of course some of them took profits/cut loss, however majority were still hoping and fear. On the next phase of sharp decline, the public was totally annihilated and no one was sparred. This time round, they gave up, liquidate everything and trust me their confidence was shaken and lost! They were in a despair mode and not wanting to punt on that particular market/stock again. Didn't i told you when the market corrects, big operators are secretly buying in? Their buying activity can be spotted if you know how to read the charts.
At a certain juncture, prices looked attractive again and big operators started to load in again. By this time, even if the public was not viewing this stock, his friends, brokers, news will induce him to check out this stock again, since it rebounded strongly. The public must be pretty fed up and dishearten since he cut loss early and now that it had rebounded. In his mind, he was thinking that he could have wait a little longer more before cutting losses. The stock price rose up for 4-5 days and started to recedes. The public believed that the reaction and the price level must be now attractive and it might be a good time to buy again. Didn't i told you he could not control his urge when he saw prices moving up sharply? And so he bought in again, of course the price level where he bought could bring him profits again. Now, from his first experienced, he lost money because he was greedy. In his mind, he was thinking that this time round, he is going to make back all his lost and not be greedy. And so prices continued to climb and reached a point where he found that his lost all turned profits now. He took some profits because of the first experienced, but still holding majority of the shares to allow him to ride further profits. This time round the stock reached the second top almost at the same level as the first top. He was on high alert this time, making sure he doesn't lose back all the profits. Didn't i told you that the public was not trained to read where big operators are unloading? So came the first day where the big operators started unloading, the public was hoping that this was just a small reaction, further up move will continue. On the second day, prices declined so sharply that the public knew what was happening but could not take profits/cut losses because psychology he could have taken profits way above, and so he prayed and hoped for a rebound. No strong rally occurred and prices continued to dip, he knew if he do not cut losses now, he would be in dip trouble and finally he managed to take a little profits which was not worth his risk/cut losses. By now, his confidence was totally and i mean totally shaken that he wouldn't want to ever touch this stock again! Well, as for the big operators, they managed to hide their true campaigns of bearishness by first tricking the public the SECOND time thinking that the stock is in a bullish uptrend where instead the stock is going in for a deep downturn. They had successfully manipulated the public's mind. See, i told you the stock market is not designed to allow you to make money. That's the way how all market works and how this double top analogy came by. Double Top is a stressful yet effective maneuver to emotionally tire and psychologically testing the public guts and endurance.
I would highly recommend not to treat double top as a pattern where if you see a double top, you start short selling. Don't limit yourself to chart patterns because everyone says a double top is a short or a double bottom is a long. There are certain cases where a double top occurs and the market went on higher. Understand the mindset of the big operators and their campaign is much more important that just blindly executing trades based on chart patterns. There are always evidence of strength/weakness when the market is about to reach the top/bottom and judgement has to be made on whether a further rally or further reaction continues. Remember the lowest risk is ALWAYS at the danger point.
This analogy is almost the unerring guide to Double Top and i hoped i gave you a strong insight on the psychology on double top. Now, it's up to you to decide if you want to continue using chart patterns to trade or be a student of the market and understand how it operates.
Ronald K
