We often get asked what to look for when waiting for a stock to show “signs of price strength.”
While there are many technical and fundamental answers to this question, one of the simplest and most powerful is the double bottom pattern.
The double bottom is a bullish reversal pattern that signals a potential change in trend from a downtrend to an uptrend.
It is characterized by two distinct lows at roughly the same price level, with a moderate peak in between.
The pattern resembles the letter “W,” indicating that the market has tested a support level twice and failed to break below it, suggesting that the downtrend may be coming to an end.
Let’s look at an example to show you what we mean…
Here we can see AT&T stock gathering strong bearish momentum before it shows some early signs of a reversal at around $37.47 (first green arrow).
While it may be tempting to assume that a reversal is happening, this is simply too strong of a conclusion too early.
We can see however that a second dip happens, with the stock bouncing off approximately the same price point (pink line).
The fact that the $37.47 level was tested twice gives us a stronger indication that a reversal may be underway.
To give us yet another indication, we wait until the price action crosses above the nearby resistance level (the green line).
If all of these events happen, then we have a double bottom confirmation!
Keep in mind that the shape of the bottom can vary from setup to setup…
For instance, we can see with TVIX here that the bottoms are not a single point but rather a series of points.
This setup is actually stronger than the previous one because the support level (green line) is tested more times.
Keep in mind that the stock market is a game of probabilities rather than certainties!
Just because we identify a double bottom does not guarantee that the reversal will take place.
Anyways…
That’s all for now!
Until Next Time,
-Damian
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