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doublebottom
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Double bottom chart

Double bottom chart

What is Double Bottom Pattern?

Double Bottom is a bullish trend reversal chart pattern formed after good bearish price move (a continuous price down for a good duration) where the downward price movement looses its steam (first bottom) and it retraces a bit (to neck line or mid point).

Then again it moves in direction of original trend and reaches the first bottom level there by forming second bottom. It again cannot move down first bottom and start moving to neckline. Once the neck line is broken uptrend is seen.
Understanding Double Bottom in details Double bottom is formed when the stock moves down for many days and the movement is steep towards the end. And then it goes up from there by about 10-15% . After this it again tries to move down and reaches level of previous low but cannot cross its previous low. After this it again starts going up to a level of neckline. Once it retraces above neckline a uptrend starts.
Please note that in actual practice, the two bottom may not be exactly at same level. Generally, second bottom is a slightly higher level but 1-2 % lower then first level is also acceptable. A significant lower second bottom may be dealt with lot of suspicion as it may indicate continuation of downtrend. Shape of the bottoms can be from sharp and pointed to rounds one.

Volume in double bottom has a lot of significance as it can help to confirm formation of the pattern. Volume during first bottom should generally be much higher than volume during second bottom formation and volume during midpoint formation should be much lower than volume during neckline break out. Please avoid aggressive positioning when volume is not supporting the move. For aggressive traders a strict stop loss is recommended.

It is very fairly common to see a pullup near to neck line after formation of the pattern. It should generally be seen as a healthy thing as it gives better confirmation of neckline as resistance. In some case the pull up may happen few times. If this happens too many times then it may not be typical double bottom pattern. In case of pullup, it is recommended to keep a stop loss of about 3% below neck line.

Double bottom formation generally happens when knowledgeable investor sense value in stock and start selling thus resulting in slow and steady decrease in price with gradual down in price. Seeing the trend many more people jump in to make quick bucks by short selling. This leads to lower jump in price. Once this is known to lot of uninformed people, they jump in and moves the price to a very low level (bottom 1).

But this price is unsustainable and smart investors starts booking profit resulting in increase in price to a level of midpoint. To lot of uninformed people who missed the boat during first rally, jump in considering it 'sell' opportunity and results is decrease in the price to previous low but this time volume is less. As the lower point is unsustainable, the price hike to neckline where it may get some resistance. Once the neckline is broken with good volume a typical trend reversal starts to reach a fair value but the upward momentum can take it to upper fair price range and thereby making a classic double bottom pattern.



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