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The double bottom pattern is a kind of candlestick pattern characterized by a W-shaped price chart. A double bottom pattern is also defined as a classic technical analysis charting formation representing a significant change in trend from a previous down move.
It describes a drop in the price of a security or index, a rebound, a subsequent decline to a similar level as the initial drop, and finally, another rebound (that may become a new uptrend). The double bottom appears 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.
The double-bottom pattern can also be found in bar charts & line charts. It is formed when a stock’s price drops and rises twice in succession. The lows reflect the two ‘bottoms’ of the pattern. The double bottom usually appears at the end of a downtrend in the asset’s price.
Regarding profit targets, a conservative reading of the pattern indicates that the minimum-move price target is equal to the distance between the two lows and the intermediate high. More aggressive targets are twice the distance between the two lows and the intermediate high.
In technical analysis, a double bottom is essential as it denotes that an important low or strong level of support has been reached after a down move. While the double-bottom low is in place, price movement is expected to exhibit a retracement higher and potentially suggest the start of a new uptrend.
By a similar token, a drop below the double-bottom lows in subsequent periods signals the downtrend is resuming and the bears have reasserted their primacy.
Like many chart patterns, a double bottom design is best suitable for analyzing the intermediate-to longer-term view of a market.
Also, during the formation of the pattern, one should closely monitor the volume. A rise in volume usually happens during the two upward price fluctuations in the pattern. These spikes strongly indicate an upward price pressure and act as greater confirmation of an actual double-bottom pattern.
Once the closing price is in the second rebound and is approaching the high of the first rebound of the pattern (the middle of the “W”), a significant expansion in volume is coupled with fundamentals indicating that market conditions are conducive to a reversal.
No, there is no criterion for the relative levels of the lows; however, they should be within 3% to 4% of each other. Besides, a higher second bottom reflects the selling pressure has come to an earlier end, indicating the low of the first bottom is a potentially highly significant support level. It is surprising how often the double-bottom lows are similar, adding great significance to the low price point as significant support.
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