Stock 3d Percent Returns Chart and Return Map: A Double Top Signals a Downside
A double top is a frequently observed topping formation that occurs when a top is followed by a short-term downside and then a short-term upside that culminates with a second top. The second top is approximately the same value as the first top and is usually followed by a significant long-term downside.
Sometimes a double top will be followed by one or more tops to form a multiple top. But multiple tops are not very frequent so assume that a double top probably signals the beginning of a prolonged downside.
Amazon.com (AMZN) made an easy to recognize double top in 1999 just before the tech bubble burst in early 2000. The first top occurred on April 23, 1999 at $105.06. The second top occurred on December 10, 1999 at $106.69. The red trend line shows the downside after the second top. AMZN closed at $7.46 on September 24, 2001, a 93 percent decline from the second top.
The 3D percent returns chart shows the gains and losses for the biweekly buy and sell returns from January 1998 through September 2001. The second top has the largest percentage gain of all of the returns followed by the gain of the first top.
The green areas represent the profitable returns and the red areas represent the unprofitable returns. Of the 4,753 buy and sell returns 2,317 (48.75%) made money and 2,436 (51.25%) did not.
The large red area in the right portion of the chart is the result of buying on the upside and selling on the downside.
The return map has no relief so it simply shows the profitable trades in green and the unprofitable trades in red. The blue vertical line delineates the buy upside (before the second top) and sell upside trades from the buy upside and sell downside (after the second top) trades. The blue horizontal lines delineates the buy upside and sell downside trades from the buy downside and sell downside trades.
The dark green area represents the highest profitable returns of the buy and sell combinations that occurred during the topping formation.
The buy upside and sell upside trades are represented in the predominantly green area in the upper left of the map. Most (93.28%) of these buy and sell combinations made money. The buy upside and sell downside trades occur in the upper right portion of the map. About two thirds (67.17%) of these trades made money. The buy downside and sell downside trades are located in the front right portion of the map. Only 14.39% made money so most of that area is red.