Chart Pattern Recognition Series - Double Top : Adam & Adam

Let me introduce you to the classic Adam & Adam Double Top (AADT). The hardest part of this pattern is finding and correctly identifying them. Amateurs too often confused (mis-read) this pattern because they do not pay enough attention to the identification guidelines. Amateurs often times will mistake the top of an ascending triangle as a double top and its not until the stock breaks upward (and they lose money) that the truth is revealed to them.

They primary key to this pattern is the twin Adam peaks must look similar to each other. Two well-defined peaks that are narrow and pointed (Adam peaks) whose price are very close to one another. This should not be confused with two peaks where one is rounded or wider in any way thus forming an Eve peak and should be traded differently. This downward breaking pattern requires two price spikes touching near the same price and sporting heavy volume near the two peaks. The volume pattern should form a U-shape between the peaks, with volume usually being heavier on the left peak.

Prices that are trending upward leading into the pattern should not form a third peak. There should only be two minor highs. The proceeding valley between the tops helps us determine both a target price and how well the breakout will perform. Patterns with large dips (tall patterns) perform better than small (short) ones. The difference between the two peak prices should be between 0% and 4%. The closer these prices are together the better the chances the pattern is a true AADT. The confirmation of a valid AADT is when the price closes below the lowest low between the two peaks. I have marked that line in the above stock chart of Resmed Inc. (RMD). Notice the failed confirmation at $42.95 the price pullback here. This is where a lot of investors get greedy and thus get in trouble. Over 65% of the time the stock price will not drop to the confirmation line before making a new high.

The average decline of the AADT pattern is 19%. To get a more accurate target price, one should take half the difference between the top peak and the lowest low between the two tops. Subtract this value from the lowest low and you should see your new target price reached 70% of the time on average. Good luck and good trading!

Investor Term of the Day: Forward Interest Rate
An interest rate which is specified now for a loan that will occur at a specified future date. As with current interest rates, forward interest rates include a term structure which shows the different forward rates offered to loans of different maturities.