The Double Bottom pattern is a pattern that looks like a “W”. This pattern is less frequent than other reliable patterns but I promise you, you need to learn it, study it and look for it.
One key to notice and look for when analyzing the Double Bottom pattern is to make sure the second leg down, or second bottom undercuts the low of the first bottom. This in essence scares out the final investors who didn’t sell the first go round. This second leg down that undercuts the previous low typically serves two purposes.
One: The investors that were not scared out during the first drop notice the stock making a new low and probably suspected the previous low as a new support level. Now that that support is broken, they run for the door.
Second; Institutional investors typically look for this pattern and swoop in to accumulate more shares, ultimately driving the price up again.
When and where to buy a Double Bottom?
The proper buy point is .05-.10 cents above the middle part of the pattern or the “W”. An even healthier sign of this pattern is when it forms a handle. The formation of a handle is not essential. A handle is formed when the second part of the pattern completes the “W” but starts to drift down slightly over a few days to a few weeks. When the stock breaks above the top of the handle, this is your buy point.
What about Volume?
You want to see an explosion of volume on the day the stock breaks above the Mid-point of the pattern or above the high of the handle. An explosion means 100%+ increase compared to its daily average volume or its weekly average volume if you are looking at a weekly chart.
Remember, your correct buy point with this pattern does not have to be at an all-time high, just make sure its above the high of the handle or the mid-point of the “W”.
Pro Tip: Always scan both daily and weekly charts when creating your watch list. You’ll be amazed at what you can see if you look at both.
In the early 1980’s, Price Co. formed a 45 week double bottom, with handle and from the breakout to top, increased an amazing 1293%.
Nokia in 1998 is another prime example of a double bottom pattern that went on to produce huge gains. As the Nasdaq struggled to find it trend, Nokia went along for the ride. As the Nasdaq increased so did Nokia. As the Nasdaq sold off, so too did Nokia until late October, early November of 1998 when finally, Nokia would form a slight downward angle, low volume handle and explode higher as the Nasdaq confirmed its new rally. Nokia would go onto almost double in price in under 6 months.
Hanson Natural Corp. was another of these Super stocks to break out of a double bottom base. From September of 2005 to December of 2005, Hansen formed a double bottom base and then exploded out on ridiculous volume. It was like it drank a keg of the energy drink it produced; Monster Energy. The stock broke out at around $13.50 a share and climbed all the way to over $50/share by September of 2006 before cratering back to earth.
Double Bottom pattern examples:
Cisco Systems, EBay, Humana, Sun Micro to name a few more stocks that formed double bottoms. The list goes on and on.
Remember the 7 characteristics we talk about in the Active Investor Course, all of these possessed them before they formed their patterns and exploded for great investment profits.
Hansen was no different, great new product, accelerating sales and earnings, so on and on.
Even the best, most reliable chart patterns fail sometimes. One of the faults to look for in the double bottom pattern is when the middle section of the “W” goes into higher ground than the beginning part of the “W”. A proper Double Bottom pattern will have a middle section that falls short of the old high.
Another characteristic of faulty Double bottoms and all patterns that I see is when there are more down days on bigger volume than up days on bigger volume.
A third fault in a double bottom bases and most bases we focus on is if the pattern is too short in duration. A pattern that only spans few weeks to four weeks doesn’t seem to give enough time for investors commit or be shaken out and finally
Finally, bases that are too sloppy. The more the pattern look like a “W” the better. A base that forms and swings all over the place is usually too erratic to be counted as a reliable pattern.
Until next week, hit me up with any questions or topics you’d like to cover in the future,
Welcome to the Nerdery,