Double Bottom
A double bottom pattern is a classic technical analysis charting formation that represents a major change in trend and a momentum reversal from a prior down move in market trading. It describes the drop of a security or index, a rebound, another drop to the same or similar level as the original drop, and finally another rebound (that may become a new uptrend). The double bottom looks like the letter "W." The twice-touched low is now considered a significant support level. While those two lows hold, the upside has new potential.
In terms of profit targets, a conservative reading of the pattern suggests the minimum-move price target is equal to the distance of the two lows and the intermediate high. More aggressive targets are double the distance between the two lows and the intermediate high.
Definition
The double bottom pattern is a classic technical analysis chart formation that represents a trend change and momentum reversal in market trading. It describes a security or index that declines, rebounds, falls again to the same or similar level as the previous low, and then rebounds again (potentially forming a new uptrend). The double bottom shape resembles the letter 'W'. The two touched lows are now considered important support levels. As long as these two low prices hold, there is new potential for an upward movement.
Origin
The concept of the double bottom pattern originated in the early stages of technical analysis, dating back to the early 20th century. Charles Dow, one of the founders of technical analysis, mentioned similar market reversal patterns in his Dow Theory. Over time, the double bottom pattern has been widely accepted and applied in various financial markets.
Categories and Characteristics
The double bottom pattern mainly falls into two categories: standard double bottom and complex double bottom. The standard double bottom is simpler, with two lows and a middle high forming a clear 'W' shape. The complex double bottom may contain multiple small fluctuations, but the overall pattern still resembles a 'W'.
Characteristics:
- Standard Double Bottom: The two lows are almost at the same level, reflecting strong support.
- Complex Double Bottom: May contain multiple small fluctuations, but the overall pattern still resembles a 'W'.
Specific Cases
Case 1: A stock drops from 100 yuan to 80 yuan at the beginning of 2023, then rebounds to 90 yuan, drops again to 80 yuan, and finally rebounds above 100 yuan. This pattern forms a standard double bottom. Investors can buy when the price touches 80 yuan for the second time and confirm the reversal when the price breaks 90 yuan.
Case 2: An index drops from 2000 points to 1800 points in mid-2022, then rebounds to 1900 points, drops again to 1800 points, and finally rebounds to 2100 points. This pattern forms a complex double bottom. Investors can buy when the price touches 1800 points for the second time and confirm the reversal when the price breaks 1900 points.
Common Questions
1. How to confirm the formation of a double bottom pattern?
Answer: The double bottom pattern is usually confirmed when the price touches the low for the second time and rebounds, especially when the price breaks the middle high.
2. Is the double bottom pattern always accurate?
Answer: Although the double bottom pattern is a strong reversal signal, it is not always accurate. Investors should analyze it in conjunction with other technical indicators and market conditions.
