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ANALYZING CHART PATTERNS: DOUBLE BOTTOM

Double Bottom

This is the opposite chart pattern of the double top as it signals a reversal of the downtrend into an uptrend. This pattern will closely resemble the shape of a "W".

Double-bottom pattern

The double bottom is formed when a downtrend sets a new low in the price movement. This downward move will find support, which prevents the security from moving lower. Upon finding support, the security will rally to a new high, which forms the security's resistance point. The next stage of this pattern is another sell-off that takes the security down to the previous low. These two support tests form the two bottoms in the chart pattern. But again, the security finds support and heads back up. The pattern is confirmed when the price moves above the resistance the security faced on the prior move up.

Remember that the security needs to break through the support line to signal a reversal in the downward trend and should be done on higher volume. As in the double top, do not be surprised if the price returns to the breakout point to test the new support level in the upward trend.

Price Objective and Adjustments

It's important to get an idea as to the size of the resulting move once the signal has been formed. In both the double top and double bottom, the initial price objective can be measured by taking the price distance between the support and resistance levels or the range that chart pattern trades.

Often in technical analysis and chart patterns, we're presented with an ideal chart setup; but in reality the pattern doesn't always look as perfect as it's supposed to. In double tops and double bottoms one thing to remember is that the price on the second test does not always need to reach the same distance as the first test.

Another problem that can occur is the second testing point, where the top or bottom actually breaks the level that the first top or bottom test created. If this occurs, it can give a signal that the previous trend will continue - instead of reverse - as the pattern suggests. However, don't be too quick to abandon the pattern as it could still materialize.

If the price does, in fact, move above the prior test, look to see if the move was accompanied by large volume, suggesting a trend continuation. For example, if on the second test of a double bottom the price falls below the support line on heavy volume, it is a good sign the downward trend will continue and not reverse. If the volume is very weak, it could just be a last attempt to continue the downward trend, but the trend will ultimately reverse.

The double tops and double bottoms are strong reversal patterns that can provide trading opportunities. But it is important to be careful with these patterns as the price can often move either way. Consequently, it's important that the trade is implemented once the support/resistance line is broken.