POINT AND FIGURE LIBRARY

The Chart Formations
The Double Top and Double Bottom

The most basic point & figure formation is the double top and double bottom.

In fig.1, the first column of Xs depicts the stock advancing to 750p. At that point sellers temporarily overcame buyers and forced the stock back down to 690p, depicted by the column of Os. It could fairly be said that 750p was a point of resistance, a point where the force of the buying power was overcome. Thereafter the stock advances back up to 750p, forming a double top at that level. Until it breaches the established level of resistance, as shown in fig.2, no safe conclusion could be drawn about the future destination of the stock. Once 760p prints, the dominance of the buyers is re-affirmed. The breach of the double top is said to constitute a buy signal.
Note that in forming the double top at 750p, the stock may pause at that level for several days, or perhaps only a few minutes. It matters not.

The converse formation is the double bottom.

Although A.W.W Cohen does starts off with these two formations as his first buy/sell signals, in my opinion they are simply not reliable enough to count as buy/sell signals.
Naturally you will see a lot of double tops and bottoms being breached in the course of any trend. The breach of a double top in an uptrend is valuable in that the making of new highs confirms the continuation of the uptrend. By contrast when there is a breach of a double bottom during an uptrend, it is a negative sign. It casts doubt on the continuation of the uptrend because the presumed support (made by the first column of Os) has not held.
Of course, on a small box chart the support which has failed to hold may have been so minor that its breach is almost irrelevant. If you examine the price action on a bar chart to see exactly what it takes to form a breach of double top or bottom, you will notice that in no real sense can the market be described as having been in an equilibrium before the breach. I prefer signals that clearly portray a meaningful disequilibrium.
There are 2 good reasons, however, not to ignore double tops and bottoms:
(i) I do use them very occasionally to close an unsatisfactory position, but only where there is no clearer signal from any of my charts, including the swing chart.Occasionally there is no clearer signal from any of the charts, other than the breach of a double bottom in an uptrend, or the breach of a double top in a downtrend. Very occasionally I use that signal to close an unsatisfactory position.
(ii) It is worth looking out for the breach of a double bottom in an uptrend or the breach of a double top in a downtrend (i.e what looks like negative price action). As you will see later on these These formations can convert themselves into one of my favourite signals, the bullish and bearish shakeout, by reversing shortly after the double top or bottom is breached.

Next: The Bullish and Bearish Signals

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