Identify a Double Bottom on a Stock Chart

By Stock Research Pro • October 24th, 2009

A double bottom is a term used in technical analysis to describe a drop in the price of a stock, index, or another security, a price rebound, a subsequent drop to the same level and another rebound. Many technical analysts believe that a true double bottom forms only when the rebound from the first bottom exceeds 10% with the second bottom established within a 2% - 3% range from the first bottom with the distance between the two ranging from a few weeks to a few years (depending on the length of the chart being used). A double bottom is seen as a signal of a major reversal following a price downtrend.

Double Bottom and Trading Volume

When analyzing and confirming a double bottom, investors are encouraged to monitor trading volume to confirm the pattern. Generally, the volume tends to be higher during the first low than the second with volume increasing again as the pattern moves toward a breakout. Volume is critical to confirm the validity of a double bottom.

Breakout and Pullback

The double bottom is seen as complete when the resistance from the highest level between the two lows is broken (again, supported by increased volume). A pullback following this breakout is typical as there may be a test of this newly created level of support.

Calculate the Resulting Price Target

To calculate the potential price move to the upside following a double bottom, many investors will simply calculate the difference between the highest high and the lowest low and add that difference to the highest high. For example, if the lowest low was 100 and the highest high was 150, the difference (50) is added to the highest high, resulting in a target price of 200.

The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.


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