A double bottom pattern consists of two lows reaching the support level of a given stock price. It predicts an immediate reversal of the trend.
How a Double Bottom pattern signals a downturn reversal
A chartist pattern present in certain cases of trend reversal, the Double Bottom is characterized by three main criteria :
- The value of the stock price forms a "W" (sometimes it forms a "WV", in which case it is referred to as a"Triple Bottom");
- The trend prior to this figure is bearish and reverses after the Double Bottom (thus becoming bullish);
- The breaking of the "Neck Line" (term explained below).
Chronologically, the Double Bottom follows seven key steps :
- Downward trend
- Reaching a first low point
- Reversal of the trend (which has become bullish) up to the Neck Line, i.e. the high between the two bottoms of the Double Bottom
- Reversal to the downside until the second low is reached, attesting to a support threshold in this value area
- Upward trend whose slope is proportional to the previous downward trend (point n°1)
- Throwback at the Neck Line: attempt by sellers to reverse the trend and decrease the value of the financial asset
- Two scenarios are then possible: either the throwback is successful and the chart pattern becomes a Triple Bottom or the trend remains bearish, or the throwback is unsuccessful, and the break of the Neck Line validates the Double Bottom pattern.
Depending on the case, the Double Bottom pattern allows for a wider or narrower gap between the two bottoms. The narrower the gap, the higher the probability of a bullish reversal of the trend, and thus the validation of the Double Bottom. Similarly, the lows may be peak-shaped or, on the contrary, round.