John Lansing

Technical Analysis 101: Double-Bottom and Double-Top

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Technical analysis is full of patterns, most aptly named for the type of shape they make.

Below, I'll describe two of the more common ones for you that are considered classic longer-term patterns.

Double-Bottom

A double-bottom occurs when prices form two distinct lows on a chart. A double-bottom is only complete, however, when prices rise above the high end of the point that formed the second low.

The double-bottom is a reversal pattern of a downward trend in a stock's price. This formation marks a downtrend in the process of becoming an uptrend.

Double-bottoms are among the most common of the patterns. Because they seem to be so easy to identify, the double-bottom should be approached with caution by the investor.

As seen above, a double-bottom consists of two well-defined lows at approximately the same price level. Prices fall to a support level, rally and pull back up, then fall to the support level again before increasing.

The two lows should be distinct. According to technical analysis experts Robert D. Edwards and John Magee, the second bottom can be rounded while the first should be distinct and sharp. The pattern is complete when prices rise above the highest high in the formation. The highest high is called the confirmation point.

Traders should pay close attention to volume when analyzing a double-bottom.

Generally, volume in a double-bottom is usually higher on the left bottom than the right. Volume tends to be downward as the pattern forms. However, volume picks up as the pattern hits its lows.

Volume increases again when the pattern completes, breaking through the confirmation point.