| Tickers in this article: LOW, KMB, CME, ZIOP A common price reversal pattern is the double top. It occurs when the price rallies to a high, pulls back and then rallies to a similar high before pulling back again. The inability of the price to make a new high is the first warning sign. It shows the uptrend is losing steam. A double top chart pattern "completes" when the price moves below the pullback low seen between the two peaks. When that occurs, the trend has reversed, and the most likely direction is down. These four stocks have completed double top patterns, but they are still hanging around the breakout point.
The double top pattern provides a price target for each trade. It's the height of the pattern, which is the high minus the pullback low, subtracted from the breakout price (pullback low). This is the target method used for the trades below, with target price rounded up to slightly to increase the chance of it being reached.
Lowe's Companies Inc. (LOW) 
Lowe's Companies Inc. (LOW) reached $76.25 in March and then fell to a low of $65.83 in July, forming the first half of the double top. The August rally reached a second peak--a lower one--of $74.78, before collapsing to a new low at $64.22. That break below the prior low completed the double top, indicating the price could slide to $57. On September 1 the stock closed at $67.75, just above the breakout level. Consider a short trade with a stop loss above minor resistance levels at $70.19 and $71.
Kimberly-Clark Corporation (KMB) 
Kimberly -Clark Corporation (KMB) peaked at $119.01 in January, fell to a pullback low of $103.67, then rallied to second peak of $117.95 in August. On August 26 the price reached a low of $103.11, breaking below the former pullback low. That completed the double top, and provides a downside price target of $90. The September 1 close of $104.03 is just above the breakout point, with minor resistance at $108.11 and $109.45. Consider placing a stop loss just above these recent swing highs.
CME Group Inc. (CME) 
CME Group Inc. (CME) reached a March high of $100.61 and a July high at $100.87. The pullback in between, and breakout point of the double top pattern, is $88.22. That low was broke in August when the price reached a new low of $84.33. The downside target for the completed pattern is $76. Since the low, the price has moved back into the pattern, but the bias remains down. Consider placing a stop loss above the August 31 high of $95 on short positions.
ZIOPHARM Oncology, Inc. (ZIOP) 
ZIOPHARM Oncology, Inc. (ZIOP) peaked at $14.40 and $14.08 in March and August, respectively low. The pullback low at $8.63 was breached on August 20 as the price continued to sell off to a new low of $7.07. Since the low minor resistance has formed at $9.29, as that is the short-term swing high on the rally off the low. Placing a stop loss just above $9.29 keeps the risk very tight, offering an attractive reward-to-risk ratio. Yet in a volatile stock, a tight stop loss also has a high probability of being touched before a more significant move develops. The significant move in this case is a decline to the target of $3.25.
The Bottom Line These stocks have completed big double top chart patterns; if the patterns plays out, the prices could head significantly lower. There are no assurances the pattern will play out though. The price could rally back into the pattern, drop only a little, or just range. A chart pattern provides a way to trade a stock, but doesn't necessarily indicate what it will do next. Keep that in mind when trading. We can't assume we know what is going to happen; therefore, use stop loss orders to limit risk in the event of being wrong, and only risk a small percentage of account capital on any single trade.
Refine Your Financial Vocabulary Sign up to receive our FREE Term of the Day newsletter. Gain a better understanding all things financial with technical and easy-to-understand explanations. Click here to begin developing your financial language with this daily newsletter. Disclosure - At the time of writing, the author did not own shares of any company mentioned in this article.
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