What to look for in charts: Double Bottom Pattern

Overview:

What is a Double Bottom?

What Does it Show/Tell?

What is a Double Bottom Pattern?

A double bottom pattern is a technical analysis charting pattern that describes a change in trend and a momentum reversal from prior leading price action. It describes the drop of a stock or index, a rebound, another drop to the same or similar level as the original drop, and finally another rebound. The double bottom looks like the letter "W". The twice-touched low is considered a support level. This can be more clearly seen in the image above.

What does it Show/Tell?

Generally the first drop should be around 10 to 20%, and the second drop should be roughly 3 to 4% from the first drop. This is a rule of thumb to keep in mind when analyzing the stock market.

A double bottom pattern is best suited for analyzing the intermediate- to longer-term view of a market. Generally speaking, the longer the duration between the two lows in the pattern, the greater the probability that the chart pattern will be successful. At least a three-month duration is considered appropriate for the lows of the double bottom pattern, in order for the pattern to yield a greater probability of success. It is, therefore, better to use daily or weekly data price charts when analyzing markets for this particular pattern.

When the stock comes back up the second time and follows an upward trend, be aware of the volumes. If the volume of buys skyrockets then that is your safest bet to make a purchase. In the above chart the best time for a buy would have been roughly in late June.

Double bottom formations are highly effective when identified correctly. However, they can be extremely detrimental when they are interpreted incorrectly. Therefore, one must be extremely careful and patient before jumping to conclusions.

KEY TAKEAWAYS

1) The double bottom looks like the letter "W". The twice-touched low is considered a support level.

2) The advance of the first bottom should be a drop of 10% to 20%, then the second bottom should form within 3% to 4% of the previous low, and volume on the ensuing advance should increase.

3) The double bottom pattern always follows a major or minor downtrend in a particular security, and signals the reversal and the beginning of a potential uptrend.