What is a double bottom pattern?
The classic double bottom pattern is one that typically forms in choppy markets. It is a quickly-developed pattern at its best, and can result in explosive breakouts. It is an exciting pattern because of the extreme price swings and the speed at which it can sometimes form. The description of the pattern fits its name. The bottom shows a double dip as opposed to that of a cup with handle. In the latter pattern the cup shows a gradual descent and ascent from the bottom (hence “cup”). In the double bottom, however, the base is characterized by two price drops that form the appearance of the letter “w”. This wild-looking action serves the purpose of weeding (or more appropriately, scaring) out uncommitted holders of the stock. A handle can form on this pattern just as with a cup with handle as things calm down and the price moves laterally, then the pattern can break out on strong volume as buyers suddenly want the stock and the only holders left demand more money for it. Breakout!
Some other characteristics are that we like to see the middle of the pattern (the “hump”) peak at a price lower than the start of the base, i.e., when it starts to fall to form the first leg lower. Preferably, the second dip down just slightly undercuts the first, which is what tends to scare out most of the remaining buyers, and sometimes the stock will just roar out of the pattern at this point without even forming a handle. A double bottom should also develop over a relatively shorter length of time, showing a narrow and steep pattern rather than a wide and smooth pattern like a cup with handle, which we usually like to see develop over a couple of months or longer. Narrow and steep tends to fuel a more explosive breakout because the action spells more fear and capitulation. This, however, is not always the case as there are some lazy double bottoms that look like two cups stuck together (e.g., GLFD). Thus, don’t discount a double bottom simply because it does not have sharp points that make the bottoms of the ‘W.’
A double bottom breakout point will be plotted the same as with a cup with handle, if the double bottom shows a handle itself: just over the high in the handle, which is usually formed near the middle peak of the “w” (a.k.a., the ‘hump’). It there isn’t a handle, we like a buy point just over the middle “hump” in the “w”.
