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TRADING STOCKS TACTICS - CHART PATTERNS |
Reversal Chart Patterns
Trading stocks education - Trading tactics & examples
Double Bottom Bullish Reversal
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Double Bottom formation is in many ways the mirror image of the Double Top. After an extended decline to new lows a stock puts-in a bottom on massive volume and a moderate rally ensues. After several sessions (sometimes weeks) the stock drifts back to test the first bottom but this time buying accelerates and another rally occurs.
Technical target is derived by adding the difference between bottom #1 and the reaction high to the new breakout level. After the second bottom has been created, the new breakout level is the reaction high. No double bottom formation is complete until the stock rallies through this level.
Although there can be variations, the classic double bottom usually marks an intermediate or long-term change in trend. Many potential double bottoms can form along the way down, but until key resistance is broken, a reversal cannot be confirmed. To help clarify, we will look at the key points in the formation and then walk through an example.
Double Bottom
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The double bottom is a major reversal pattern that forms after an extended downtrend. It is made up of two consecutive troughs that are roughly equal, with a moderate peak in between.
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Prior Trend: A significant downtrend of several months should be in place.
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First Trough: The lowest point of the current trend, fairly normal in appearance and the downtrend remains firmly in place.
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Peak: An advance After the first trough, typically 10 to 20%. Volume is usually inconsequential, but an increase could signal early accumulation. The high of the peak is sometimes rounded or drawn out a bit from the hesitation to go back down. This hesitation indicates that demand is increasing, but still not strong enough for a breakout.
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Second Trough: The decline off the reaction high usually occurs with low volume and meets support from the previous low. Support from the previous low should be expected. Even after establishing support, only the possibility of a double bottom exists, it still needs to be confirmed. The time period between troughs can vary from a few weeks to many months, with the norm being 1-3 months. While exact troughs are preferable, there is some room to maneuver and usually a trough within 3% of the previous is considered valid.
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Advance from Trough: Volume is more important for the double bottom than the double top, so the volume and buying pressure should accelerate. An accelerated ascent, perhaps marked with a gap or two, also indicates a potential change in sentiment.
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Resistance Break: Breaking resistance from the highest point between the troughs completes the double bottom. Volume should increase on breakout and/or accelerated ascent should occur.
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Resistance Turned Support: There is sometimes a test of this newfound support level (broken resistance) with the first correction. Such a test can offer a second chance to close a short position or initiate a long.
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Price Target: The distance from the resistance breakout to trough lows can be added on top of the resistance break to estimate a target.
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