Double Bottom Chart Pattern
A Double Bottom chart pattern is a bullish reversal chart pattern. This pattern typically develops after a group of buyers step in to stop the downtrend of a stock and create a support area. The Double Bottom chart pattern is formed when the share price is taken back down for a re-test of the support area.
A Double Bottom chart pattern usually develops at the end of a stock’s downtrend. This pattern typically signifies that the downtrend is over and a sharp uptrend should ensue. Before the uptrend really takes off though, there is usually a re-test of the breakout area.
There are different viewpoints on what is considered a successful re-test of the support area from the Double Bottom chart pattern. I discuss those viewpoints below and offer my opinion on the subject. Is a break below the support area good? It can be. But it can also be disastrous. I review some of the indicators to watch for that will help increase the chances for a successful development and breakout from a Double Bottom chart pattern. First, let’s start with the requirements.
Requirements
The overall appearance of a Double Bottom chart pattern looks like valleys on each side of a mountain peak. The depth of the valleys or the height of the mountain peak can vary depending upon the scale that you see the pattern developing on.
When looking at the requirements for a Double Bottom, I want to consider 2 slightly different versions of the chart pattern. The 1st version of the Double Bottom chart pattern is where the low from Bottom #2 drops below the low from Bottom #1. The 2nd version of the pattern is when Bottom #2 fails to drop below the low from Bottom #1.
Out of the 2 slightly different versions of the Double Bottom chart pattern, I like Double Bottom v2 where the low from Bottom #2 fails to drop below the low from Bottom #1. I prefer when Bottom #1 sets the low of the downtrend.
When Bottom #2 develops and does not drop below the low of Bottom #1, I consider this to be a successful re-test of the low from Bottom #1.
However in the other version of the Double Bottom chart pattern, where Bottom #2 breaks below the low from Bottom #1, one always has to keep in mind the probability of a re-test of the new low that was just created. After making a new low, a new potential peak and re-test may be necessary to still develop.
That is why I prefer Double Bottom v2 above.
Characteristics & Observations
Let’s review some of the characteristics and observations I have made with Double Bottom chart patterns over the years.
- The longer the downtrend is before a Double Bottom chart pattern, the better the chances are for a successful reversal and breakout
- The taller the Peak develops after Bottom #1, the better the chances are for Bottom #2 to develop into a successful Double Bottom chart pattern
- The more successful Double Bottom chart patterns have lows from Bottom #1 and Bottom #2 that are typically within 1% – 1.5% of each other
Breakout Area
The breakout area is the same for both versions of Double Bottom chart pattern. The breakout area is the middle peak between the two bottoms (Bottom #1 and Bottom #2) of the Double Bottom. Going long shares of the stock when its share price breaks above the middle peak can be a lucrative and typically a less risky strategy.
There are certain indicators that can be monitored to help determine if the breakout from the Double Bottom chart pattern will be successful or not. The more successful Double Bottom chart patterns will have at least some, if not most, of the following characteristics:
- Bottom #1 will be identified with a bullish reversal candlestick pattern
- Bottom #2 will be also identified with a bullish reversal candlestick pattern
- Bottom #2 will be slightly higher than Bottom #1, concluding a successful re-test of the bottom
- There will be increasing buying volume as the share price breaks out above the peak
- The MACD Histogram will either be showing selling momentum that is decreasing fast of buying momentum that is just starting to increase
Trading Strategies
Let’s look at this from an Elliott Wave perspective. If Bottom #2 is slightly lower than Bottom #1, proceed with caution.
If You Are Looking to Go Long in the Stock
Double Bottom chart patterns identify a less risky area to initiate a long position in a stock. This is especially true when the 2nd drop does not fall below the low from the 1st drop. When a bullish reversal candlestick pattern develops at the bottom of the 2nd drop, that usually confirms the trend reversal. This is especially true if the bullish reversal candlestick develops on buying volume that is higher than the average trading volume.
Double Bottom chart patterns are typically a major buy signal.
If You Are Currently Short the Stock
Before the development of the Double Bottom chart pattern, other indicators may have provided clues that the downtrend was coming to an end. Hopefully you have started to cover your short position already. If you haven’t though, it would be wise to start repurchasing shares to lock in profits by covering your short position.
Real Chart Examples
The Double Bottom chart pattern on this daily candlestick chart for NetEase (NTES) shows a perfect set-up scenario. The set-up includes all the characteristics that I describe above as desirable traits. I will review the details of Double Bottom chart pattern set-up for NTES after you look at the chart. I’ve also mentioned some of the discussion points on the chart itself.
Reviewing the Set-Up Details for a Nearly Perfect Double Bottom Chart Pattern on a Daily Candlestick Chart for NetEase (NTES)
When Bottom #2 developed, it did not drop below the low from Bottom #1. That is my preferred version of the Double Bottom chart pattern.
Bottom #1 and #2 were both a bullish reversal candlestick pattern. Bottom #1 was a Bullish Engulfing candlestick pattern and Bottom #2 was a Hammer candlestick pattern.
After Bottom #2 was complete and the rebound ensued, a nice buying volume spike helps to confirm the upside move. That may have provided an investor confidence to enter the trade early. If not, waiting for the official buy point is still a ways higher, a $162.55 print. Preferably on higher buying volume.
Here is a current 2 year daily chart for NTES, which shows the results of the breakout from the Double Bottom chart pattern.
Double Bottom Chart Pattern Breakout Results for NetEase (NTES)
Now remember, not all breakouts from Double Bottom chart patterns end up like it did for NetEase (NTES). But when all the indicators are pointing in the right direction, chances are better than not that a nice breakout of some degree is going to ensue.
