Technical Analysis

Reversal Points

Identification of reversal points is central to profitable trading. Let's examine the price action for ICI, which shows a classic reversal pattern - a double top.

Phase 1
Here the second top fails to break resistance at 368. In a double top pattern, this indicates that the upside is capped - the stock price is going down and it's time to liquidate any long position.

How can we translate this indicator into a profitable trading strategy? We see that the second top failed to break resistance at 368 from a bottom of 304. This failure to break resistance indicates that the stock will fall further from the previous low of 304.

In fact, in a double top pattern we can estimate that the stock is likely to fall to a lower support level equivalent to the difference between the resistance level of 368 and the bottom of 304, or 64. In other words, we can predict that the new support point will be 304-64 = 240.

The information contained in this case study is believed to be correct but cannot be guaranteed. Investors should be aware that the value of investments and the income derived from them can fall as well as rise, and past performance is not necessarily a guide to future performance. The information contained in this case study does not constitute a personal recommendation to deal in any particular shares. You should consult a personal advisor to discuss the suitability to your personal circumstances and investment objectives.