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Veritas' Double Top

03/05/01 03:30:33 PM
by David Penn

Getting nailed by long tech positions in a Nasdaq nearing 2000? The double top in Veritas Software may help put a hedge between you and the hammer.

Security:   VRTS
Position:   N/A

Some of those market watchers I trust and respect the most have been bellowing from the highest rafters that tech's day is done. While this seems fairly obvious to many, others are keeping hopes alive for the nearest sign of a tech resurgence. Perhaps these folks still have visions of Nasdaq 5000 dancing in their heads. Perhaps the image of Amazon 100 (to say nothing of VA Linux 400!) is just to sweet a picture to forget.

But if you are not in that group, you may still feel that even if tech is not going to start climbing up, who's to say that it will keep going down? Trading ranges, consolidations, whipsaws ... the possibility of all these and more are likely preventing many of those who've become bearish on tech stocks from doing what bears do best: short, and short some more. With this in mind, I've gone searching for further reasons--beyond the declining earnings and guidance down and other woeful fundamentals--for those who've thought about shorting some of the tech wrecks, but haven't yet found a target for their bearish claws.

Consider Vertias Software (VRTS: NNM): software maker, member of the Nasdaq 100, and a bearish picnic basket if Yogi ever saw one. My bearishness on Veritas comes, in part, from the overall downward trajectory of both the Nasdaq in general and its top 100 in specific. But I think the case over the next few months might have been closed by the development of a double top with peaks in the spring of 2000 and again in the fall of 2000. If Bulkowski's revised measurement rule for double tops is any indication, the shares currently trading in the mid-60s could see the mid-20s in a matter of weeks.

A downside breakout on high volume has already begun in Veritas Software's double top.
Graphic provided by: MetaStock.
Double tops are, like head and shoulders tops, fairly easy to recognize--though there are a few caveats to be wary of. Two peaks in price separated by as little as a few weeks or as much as a few months are the primary characteristics of double tops. The two peaks should be distinct; it is important that they represent two separate attempts by buyers to bid prices up into and even beyond new-highs territory, and not be merely part of a singular advance. Other characteristics to look out for include a deep trough between the peak (anywhere from a 10% decline to a 20% decline is often sufficient) and a rising price trend leading into the formation in the first place. As the weekly chart of Veritas reveals, each of these characteristics (plus high volume on the downside breakout in February 2001) is present in abundance.

Prices moving down from the second top or peak must cross a horizontal confirmation line formed from the lowest point in the formation. In the case of Veritas, the lowest point in the formation is reached in March 2000 at about $75.50. It is worth noting that pullbacks in double tops are not uncommon; some believe pullbacks are common enough that traders are wise to wait for the pullback after the first cross of the confirmation line before establishing a short position. In either event, staying aware of the possibility for prices to rally somewhat after crossing the confirmation line may help avoid being either whipsawed out or stopped out before prices returned to their downward direction.

Lastly, the measure rule for double tops is rather commonsensical. Measure the formation height and subtract that value from the value of the confirmation line. Bulkowski, as I mentioned earlier, recommends halving the formation height for a more likely downside price objective, which seems reasonably conservative and is backed up by his work in the "Encyclopedia of Chart Patterns". As such, we would halve a formation height of 99.5 to get 49.74, and subtract that number from the value at the confirmation line (75.5). This is how we arrive at the price objective of $25.75 noted on the chart itself.

David Penn

Technical Writer for Technical Analysis of STOCKS & COMMODITIES magazine,, and Advantage.

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Comments or Questions? Article Usefulness
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Date: 03/07/01Rank: 5Comment: how can i evaluate price per share of vrts compare to present worth of the company............thanx

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