What's a Double Bottom?
05/19/2017 2:50 am EST
A double bottom chart pattern is a chart pattern used in technical stock analysis to describe the fall in price of a stock or index, followed by a rebound, then another drop to a level that’s roughly similar to the original drop, and finally another rebound, explains Mike Cintolo, Cabot Top Ten Trader.
Consequently, the double bottom chart pattern resembles the letter “W”.
This “W” pattern forms when prices register two distinct lows on a chart. However, the definition of a true double bottom is only achieved when prices rise above the high end of the point that formed the secondary low.
Put another way, the double bottom chart is a “reversal pattern” in an equity price’s downward trend. The price drops to a floor—a “support level”—before rallying, pulling back up, and then falling to the support level again, before rising.
A double bottom is characterized by two well-defined lows at roughly the same price level. Double bottoms are among the most commonly occurring chart patterns.
Double bottom patterns can be discerned within charts that are intra-day, daily, weekly, monthly, yearly and longer-term. The two lows should be distinct.
According to technical analysts or “chartists,” the second bottom can be rounded while the first should be distinct and sharp.
The pattern is complete when prices rise above the highest high in the formation. The highest high is termed the confirmation point.
Typically, a double bottom’s volume is greater on the left of the bottom than on the right. Volume usually is downward as the pattern forms and accelerates as the pattern hits its lows. Volume increases again when the pattern completes, punching through the confirmation point.
Why is a Double Bottom Chart Significant?
If accurately identified, the double bottom can signal a fortunate entry point for investors. To chartists, the double bottom formation indicates that the stock has reached a crucial support level and is encountering difficulty moving lower. That implies the stock has formed a low and is now positioned for an upward move.