As in most other areas of market analysis, real-life examples are usually some variation of the ideal. For one thing, sometimes the two peaks are not at exactly the same price level. On occasion, the second peak will not quite reach the level of the first peak, which is not too problematical. What does cause some problems is when
the second peak actually exceeds the first peak by a slight margin. What at first may appear to be a valid upside breakout and resumption of the uptrend may turn out to be part of the topping process. To help resolve this dilemma, some of the filtering crite­ria already mentioned may come in handy.
Filters
Most chartists require a close beyond a previous resistance peak instead of just an intraday penetration. Second, a price filter of some type might be used. One such example is a percentage pene­tration criterion (such as 1% or 3%). Third, the two day penetration rule could be used as an example of a time filter. In other words, prices would have to close beyond the top of the first peak for two consecutive days to signal a valid penetration. Another time filter could be a Friday close beyond the previous peak. The volume on the upside breakout might also provide a clue to its reliability.
These filters are certainly not infallible, but do serve to reduce the number of false signals (or whipsaws) that often occur. Sometimes these filters are helpful, and sometimes they're not. The analyst must face the realization that he or she is dealing with percentages and probabilities, and that there will be times when bad signals occur. That's simply a fact of trading life.
It's not that unusual for the final leg or wave of a bull mar­ket to set a new high before reversing direction. In such a case, the final upside breakout would become a "bull trap." (See Figures 5.6a and b.) We'll show you some indicators later on that may help you spot these false breakouts.
The Term "Double Top" Greatly Overused
The terms "double top and bottom" are greatly overused in the financial markets. Most potential double tops or bottoms wind up being something else. The reason for this is that prices have a strong tendency to back off from a previous peak or bounce off a previous low. These price changes are a natural reaction and do not in themselves constitute a reversal pattern. Remember that, at a top, prices must actually violate the previous reaction low before the double top exists.Notice in Figure 5.7a that the price at point C backs off from the previous peak at point A. This is perfectly normal action in an uptrend. Many traders, however, will immediately label this pattern as a double top as soon as prices fail to clear the first peak on the first attempt. Figure 5.7b shows the same situation in a downtrend. It is very difficult for the chartist to determine whether the pullback from the previous peak or the bounce from the previous low is just a temporary setback in the existing trend or the start of a double top or bottom reversal pattern. Because the technical odds usually favor continuation of the present trend, it is usually wise to await completion of the pattern before taking action.Time Between Peaks or Troughs Is ImportantFinally, the size of the pattern is always important. The longer the time period between the two peaks and the greater the height of the pattern, the greater the potential impending reversal. This is true of all chart patterns. In general, most valid double tops or bottoms should have at least a month between the two peaks or troughs. Some will even be two or three months apart. (On longer range monthly and weekly charts, these patterns can span sever­al years.) Most of the examples used in this discussion have described market tops. The reader should be aware by now that bottoming patterns are mirror images of tops except for some of the general differences already touched upon at the beginning