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DOUBLE TOPS


Exxon Mobil Forms Double Top

08/13/08 08:52:19 AM
by Alan R. Northam

XOM has formed a strong complex double-top trend reversal pattern. A decisive close below the pattern's confirmation line will signal a major trend reversal from up to down.



Security:   XOM
Position:   N/A

Figure 1 shows the daily price chart for Exxon Mobil (XOM). During the fourth quarter of 2007, Exxon formed a double top, one top during October and a second top in late December. By itself, these two tops formed a double-top trend reversal pattern that was confirmed when the price fell below the minimum price of $82 between these two peaks during January 2008. These two tops, the one in October 2007 and the one in December 2007, pointed out the importance of $94 as a line of resistance to be respected. Ultimately, this fourth-quarter double-top formation was found to be a false trend reversal pattern, as by the end of the first quarter of 2008, price was moving upward instead of downward.


FIGURE 1: XOM, DAILY. This chart shows a complex double-top major trend reversal pattern. A close below the decisive confirmation line will complete the double-top pattern and signal a major trend reversal from up to down.
Graphic provided by: StockCharts.com.
 
Double-top formations are not the most common of the major trend reversal patterns. The most common trend reversal pattern is the head & shoulders pattern. However, when a double-top trend reversal pattern does appear, traders normally sit up and take notice. But as Figure 1 shows, not all trend reversal patterns forecast a trend reversal 100% of the time, not even the double top; trend reversal patterns do fail from time to time.


In mid-April, XOM had managed to trade back up to the $94 area once again, and once again found this price level to be a line of resistance. XOM bounced off this line of resistance, traded back down to just below $88, and then attacked again the $94 level for the fourth and final time. This time, XOM was able to break out above $94 during the the trading session on May 21 but ended the session below the opening price of the day and near the low of the day, forming a false breakout. After four attempts, XOM found $94 to be simply too strong a line of resistance to penetrate and from that day forward, XOM started to sell off.


When we look at the whole picture, what we see is a larger double-top trend reversal pattern. We see the first top to be formed of not just one price peak but two, and we see the second top to be formed by two price peaks as well. In between these two tops is a deep valley or price minimum to just above $76; I call this a complex double top. I tried to look it up in chart expert Thomas Bulkowski's Encyclopedia Of Chart Patterns, but I did not find it; evidently, this pattern must be rare. I believe this pattern to be a strong double top, as there were not just two attempts at making a higher high but four, and after four attempts, XOM still could not trade decisively above $94.



From the final attempt at making a new higher high in late May 2008, XOM reversed directions and started to sell off, forming a downward sloping trading channel. I have also drawn a green horizontal line off the price minimum made in January. This line represents the double top confirmation line. A close below this line confirms the double top as being a completed formation. On August 4, XOM closed below this confirmation line, thus completing the double-top formation. I have also shown a second confirmation line drawn at a price level of 3% lower. This second line is called the decisive confirmation line. A close below this line will indicate that XOM has moved decisively lower to confirm the completion of the double-top formation. This line helps minimize false signals but does not eliminate them altogether. As noted by the price chart, XOM has yet to trade below this lower confirmation line.

In conclusion, Exxon Mobil appears to have made a strong complex double-top trend reversal pattern. Exxon also now appears to be trading in a downsloping trading channel and has closed below the double-top confirmation line, indicating that the double-top formation is now complete, signaling that a reversal in trend has occurred. However, XOM still has not closed decisively below the double-top confirmation line and could still turn back higher to invalidate the trend reversal pattern. To help reduce the possibility of a false reversal signal, a second confirmation line 3% lower than the first has been drawn. A close below this second line will indicate a decisive move lower and will help confirm the completion of the double-top trend reversal pattern, signaling that the major trend for XOM has reversed from up to down.




Alan R. Northam

Alan Northam lives in the Dallas, Texas area and as an electronic engineer gave him an analytical mind from which he has developed a thorough knowledge of stock market technical analysis. His abilities to analyze the future direction of the stock market has allowed him to successfully trade of his own portfolio over the last 30 years. Mr. Northam is now retired and trading the stock market full time. You can reach him at inquiry@tradersclassroom.com or by visiting his website at http://www.tradersclassroom.com. You can also follow him on Twitter @TradersClassrm.

Garland, Tx
Website: www.tradersclassroom.com
E-mail address: inquiry@tradersclassroom.com

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