What is a Double Bottom?
The double bottom -- one of the many charting patterns used in technical analysis -- is characterized by a fall in price, followed by a rebound, followed by another drop to a level roughly similar to the original drop, and finally another rebound.
How Does a Double Bottom Work?
The double bottom charting pattern is among the most commonly occurring charting patterns, and closely resembles the letter 'W'. This 'W' pattern forms when prices register two distinct lows on a chart, as illustrated with Bottom #1 and Bottom #2 in Figure 1 below.
Double bottom patterns can appear in charts that are intraday, daily, weekly, monthly, yearly, and longer-term.
According to technical analysts or 'chartists', the second bottom can be rounded while the first bottom should be distinct and sharp. The pattern is complete when prices rise above the highest high in the formation. The highest high is termed the 'confirmation point'.
Typically, a double bottom's volume is greater on the left of the bottom than on the right. Volume usually is downward as the pattern forms and accelerates as the pattern hits its lows. Volume increases again when the pattern completes, punching through the confirmation point.
Why Does a Double Bottom Matter?
If accurately identified, the double bottom charting pattern can signal a fortuitous entry point for smart investors. To chartists, the double bottom formation indicates that the stock has reached a crucial support level and is encountering difficulty moving lower. That implies the stock has formed a low and is now positioned for an upward move.