If you are aware of the Double Top, the Double Bottom is near enough a mirror image in that a moderate rally will be seen after an extended decline which results in new lows. In terms of volume, the level will be huge and the stock will slowly drift back to the first bottom that was previously set. However, another rally will occur because buying accelerates. By working out the difference between the reaction high to the breakout level and the first bottom, the technical target can be derived. The new breakout level will have been created by the second bottom and the formation cannot be completed until the stock finally bursts through this level.
The most common double bottom represents an intermediate change in the trend; sometimes, this can even be long-term. Along the way down, there can be many potential double bottoms but the reversal can never be confirmed unless the key resistance is broken. Let’s take a look at some of the most important points.
Prior Trend - To start, there has to be a general downtrend that has been occurring for several months.
First Lowest Point - Whilst the downtrend remains strong, the lowest point of the trend is discovered.
Peak - Normally to around 20% maximum, the peak is reached with volume not being affected. With the slight hesitation to fall once more, the period in the ‘peak’ phase can sometimes be drawn out. With the hesitation, it seems as though there is an increase in demand but it is nowhere near strong enough to result in a breakout.
Second Lowest Point - After the reaction high, the second decline comes normally with low volume and will meet the support of the first low. It is important to note that the double bottom still needs to be confirmed at this point; although there has been support established, it is only a possibility at this stage. Between lowest point one and two, there could be a time period of a few weeks right up to numerous months; on average, it will fall at around two months. When comparing the lowest points, exact troughs would be preferred but there is a small leeway.
Through the Trough - Compared to the double top, volume is actually important so buying pressure will normally accelerate at this point. As a result, there is an indication of change.
Break of Resistance - The double bottom is then completed when breaking resistance between the two troughs - the highest point. On breakout, volume should increase and an accelerated ascent will be experienced.
Turning Support - With the first correction, you will sometimes see a test of the support level. If this occurs, there is an opportunity to initiate a long position or close a short one.
Price Target - If you first calculate the distance between the trough lows and the resistance breakout, you can add this to the resistance break to find a target estimation.