These ETFs and REITs were strong through to July, but sell signals have emerged in September as they complete double top chart patterns. Double tops are a reversal pattern, showing the transition from uptrend into potential downtrend. After the formation of a double top, subsequent rallies that stay below the prior highs (the two recent price peaks) are typically viewed as selling opportunities.
A double top starts with an uptrend. A pullback then develops, and when the price rallies again, it stalls near the previous price peak. When the price falls below the prior pullback low, the pattern is complete and indicates a potential trend reversal. Here’s what the formation of these patterns could mean for the price direction of these REITs and ETFs over the coming months.
American Tower Corp. (AMT) peaked at $118.26 in July, then fell to an August low of $112.29. The subsequent rally took the price to $117.31, slightly below the prior high. The price fell aggressively below $112.29 on September 9, completing the small double top pattern. The height of the pattern ($118.26 minus $112.29) is often used as an estimate for the expected price decline. That puts a downside target at $106.32. That is a relatively conservative downside target, because if a trend reversal is happening, the price could continue to drop to primary support in the $102.50 region. Rallies which stall out below $17.31 are selling are opportunities, as the price is likely to move lower before moving back above $118.26.
Vanguard Total Bond Market ETF (BND) peaked at a $84.92 in July, then quickly fell. The price consolidated below $84.50, testing that level several times (and having a false breakout above it) before collapsing below $83.88. This is not a traditional double top. The double top here occurred slightly below the high, with the double top looking more like a range than a topping pattern. Despite the awkward shape, the early September sell-off shows a potential trend shift to the downside. The next major support area isn’t until $83 to $82.50. Rallies which stall out below $84.50 are selling opportunities, as the price is likely to move lower before it moves back above $84.92.
First Industrial Realty Trust Inc. (FR) has soared in 2016, with very few pullbacks. Through August and September, the REIT has started to undergo its first significant correction of the year. Peaking at $29.75 in July, the price then dropped to $28.01, before rallying to a lower high of $29.61. The subsequent drop below $28.01 completed the double top, indicating lower prices to come. Rallies that stall out below $29.61 are selling opportunities, as the price is likely to continue dropping below the September low of $26.93 before moving back above $29.75. The double top pattern isn’t very big, only indicating a drop to $26.27. If a larger correction develops, the price could pullback into the $24.50 to $23.25 region, which would represent a 50% to 60% retracement of the 2016 advance. A 50% to 60% retracement is common in financial markets.
The Bottom Line
The double top pattern shows that upward momentum was unsustainable, and when the pattern completes, the rallies that follow are viewed as selling opportunities. The reason is that the bias has now shifted to the downside. But price is always in flux, and new patterns may emerge. While the bias is to the downside currently, if the price begins making higher swing highs and higher swing lows again (the definition of an uptrend) that could shift the bias back toward being long. Whether it is a double top pattern or some other signal that tells you to get out, always have an exit plan for taking profits on your trades.
Disclosure: The author doesn’t have positions in the securities mentioned.
{loadposition user99}