The double bottom is a major reversal pattern that forms after an extended
downtrend. As its name implies, the pattern is made up of two consecutive
troughs that are roughly equal, with a moderate peak in between.
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.
- Prior Trend: With any reversal pattern, there must be an existing
trend to reverse. In the case of the double bottom, a significant downtrend of
several months should be in place.
- First Trough: The first trough should mark the lowest point of the
current trend. As such, the first trough is fairly normal in appearance and
the downtrend remains firmly in place.
- Peak: After the first trough, an advance takes place that typically
ranges from 10 to 20%.
Volume on the advance from the first trough 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.
- 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.
- Advance from trough: Volume is more important for the double bottom
than the double top. There should clear evidence that volume and buying
pressure are accelerating during the advance off of the second trough. An
accelerated ascent, perhaps marked with a gap or two, also indicates a
potential change in sentiment.
- Resistance break: Even after trading up to resistance, the double
top and trend reversal are still not complete. Breaking resistance from the
highest point between the troughs completes the double bottom. This too should
occur with an increase in volume and/or an accelerated ascent.
- Resistance turned support: Broken resistance becomes potential
support and there is sometimes a test of this newfound support level with the
first correction. Such a test can offer a second chance to close a short
position or initiate a long.
- Price Target: The distance from the resistance breakout to trough
lows can be added on top of the resistance break to estimate a target. This
would imply that the bigger the formation is, the larger the potential
It is important to remember that the double bottom is an intermediate to
long-term reversal pattern that will not form in a few days. Even though
formation in a few weeks is possible, it is preferable to have at least 4 weeks
between lows. Bottoms usually take longer than tops to form and patience can
often be a virtue. Give the pattern time to develop and look for the proper
clues. The advance off of the first trough should be 10-20%. The second trough
should form a low within 3% of the previous low and volume on the ensuing
advance should increase. Volume indicators such as
Chaikin Money Flow,
Accumulation/Distribution can be used to look for signs of buying pressure.
Just as with the double top, it is paramount to wait for the resistance
breakout. The formation is not complete until the previous reaction high is
After trending lower for almost a year, PFE formed a double bottom and broke
resistance with an expansion in volume.
- From a high near 50 in April-99, PFE declined to 30 in November-99, which
was a new 52-week low.
- The stock advanced over 20% off of its low and formed a reaction high
around 37 1/2. Volume expanded and the 13-Jan advance (green arrow) occurred
on the highest volume since 5-Nov.
- After a short pullback, there was another attempt to break above
resistance, but this failed. Even so, volume on advancing days was generally
higher than on declining days. The ability of the stock to remain in the
mid-thirties for an extended period of time indicated some strengthening in
- The decline from 37 1/2 back to 30 was sharp, but downside volume did not
expand materially. There were two days when volume on a decline exceeded the
60-day SMA and Chaikin Money Flow dipped near -10% twice. However, money flows
indicated accumulation throughout the decline by remaining mostly above zero
with periodic movements above +10%.
- The second trough formed with a low exactly equal to the previous low (30)
and a little over 2 months separated the lows.
- The advance off of the second low witnessed an accelerated move with an
expansion of volume. After the second low at 30, 5 of the next 6 advancing
days saw volume well above the 60-day SMA. Chaikin Money Flow, which never
really weakened, moved above +20% within 6 days of the low.
- Resistance at 37 1/2 was broken with a
gap up on the open and another volume expansion. After running from 30 to
40 in a few weeks, the stock pulled back to the resistance break at 37 1/2,
which now turned into support. There was a brief chance to get in on the
pullback and the stock quickly advanced past 45