How was your experience taking a roller coaster ride?
I did my first and last one in 2011.
You see. It was a surprise birthday celebration.
My ‘genius’ friend decided to pull a prank on me.
After she removed my eye mask and earmuffs, I froze.
I tried to back out. But the car had already moved.
So, for the next ten minutes, I screamed like a girl. And some tears too.
When it was over, I kept puking at the side. Embarrassing.
What does this story have to do with a chart pattern?
At some part of the track, the steep descents had several drops.
Like the one above.
The experience of sudden plunges was…unforgettable.
It was a similar feeling when you captured a stock with a prior double bottom pattern.
Those who bought the stock too early as it forms a DB may have trouble sleeping.
It happened to me too. A few years ago.
WHAT IS DOUBLE BOTTOM?
In technical analysis, a double bottom (DB) is a chart pattern.
It starts with a drop in price and then a rebound. It's like a bouncing ball. After that, there's another pullback to somewhere close to the first dip. It will try to bounce the second time.
If the above process executed well, DB will look like the letter “W.”
WHY DOUBLE BOTTOM MATTERS?
A successful DB means the particular stock has reached a critical support level. It also indicates that it is harder to move lower. After forming a new low, it is ready for an upward move.
THIS IS HOW DOUBLE BOTTOM LOOK
This W-shaped pattern forms when prices register two ‘lows’ on a chart.
The first bottom is on the left while the second bottom must be on the right.
The setup deems complete when the price climbs above the tip of the middle peak aka breakout point.
This point is the common buy point for most people.
But for different timeframes like hour, daily, weekly and monthly, there are other strategy to enter into the stock too.
Next, let’s talk about the volume.
An ideal DB's volume is greater on the left of the bottom than on the right.
In the beginning, the selling volume is high. But it dries up as soon as it reached the first low.
Then the volume will continue to remain flat even after forming the second low.
Expect to see the volume to pick up fast when the pattern completes. It will then pierce through the breakout point at even higher volume than the prior days.
ANALYSING DOUBLE BOTTOM
Here are few things to pay attention:
Let’s get some practice. Here’s an example of an ideal DB setup.
Cellphones were gaining in popularity. Finland-based Nokia owned the majority of the market. It also made huge advance during the bull market.
The Nasdaq carved out a double bottom as a September recovery attempt failed. It sent many stocks to new lows. That helped Nokia form a double bottom.
Nokia completed its first leg down during the first week of September 1998. Notice that the stock finished higher and in the upper half of its weekly range. That's bullish.
The second leg undercuts the first bottom on the first week of October 1998. The careful chart reader could have spotted a pattern developing and put it on a watch list before it broke out.
Nokia broke out during the final week of October 1998. It rose 8% higher. That big move helped make it one of the first big winners to emerge in the new bull market.
Few more examples of DB patterns for you to study.
Do you notice that most are not perfect but still look decent?
So, you’ve seen how profitable a DB can be. It's true if you know how to execute it well.
It is common to see DB setups in stocks when the market suffered several corrections.
I can’t guarantee 100% success.
But, DB is like you releasing a submerged ball in the water. The deeper it is, the more powerful it will blast after you let it go.
Be excited when you spot one in the charts.
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