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We're going to go back to some basics of some technical analysis. I'm going to take a look at the double bottom which is a reversal stock chart pattern.
Typically, it starts with upper left, and we're moving lower. It's a bearish-like pattern, initially. But then what happens is because it's a double bottom, it's going to turn into a bullish trend.
We first create this swing point where it changes directions, and the stock will initially generate a bounce.
We also create a resistance level that the stock starts to get into. It comes and retries to go into higher prices.
But often, it can't because there's just so much negativity from this previous movement where the stock is moving lower and lower and lower. Then you got value buyers that step in, so this creates our support level.
Those value buyers, as they step in, they try and buy the stock, but there are so many short sellers. People are still afraid of the stock going lower. They're just trying to get in or get out early enough. So this is our resistance level up here.
The stock then continues to move lower and then it creates another bottom. This is how you get your first bottom. Then you'll get your second bottom, and then eventually that stock will go ahead and try and break out into higher prices.
That's what the double bottom looks like.
Typically, as far as volume goes, which you want to see if you're going to look at this volume slowly start to dry out. As we begin to continue into that double bottom, the volume would be good if it starts to dry out because that means the trend is slowly changing. There are fewer sellers taking place. That would be nice.
As we move into higher prices, as we get that bounce, it would be good if we had a little more bullish volume starting to come in right there. Then what would also be nice is that as we decline right here because again, we're changing direction. It'd be good if that also started to weaken since remembering. In the end, we want more volume on the breakout right here.
For that to happen, we want very strong or an increase in volume there towards the end as we breakout.
Ideally, that would be nice, but typically just for the pattern itself, you're looking from the support level to that resistance level as the amount of movement or the projection that you're looking at.
That's the conservative approach but of course, it could with time as it continues to move higher with inflation and all those things. It could get back into those previous all-time highs and even make further higher prices way into the future.
At times you get this stock that actually will pull back and retest these levels and then bounce. In that case, if you missed that entry opportunity, you could get a second entry opportunity, after that bounce right there.
That's another entry point that you could take a look at if you missed the first one.
That's the double bottom pattern. Of course, this could turn into a triple bottom, quadruple bottom. It could be a lot of things that change in this pattern.
The Key Things to Watch
How far has that trend been moving lower?
If it's been going down for quite a long time, maybe it's time for things to reverse.
That could be one clue. It could be a double bottom triple bottom whatever the case may be.
Also look for the volume
Is volume starting to pick up? As we start doing these bounces and if that's starting to happen, it's going to be very subtle, but that could also mean that you could be breaking out or you could be finding a bottom.
This consolidation could be six to eight weeks. It could be four weeks. You got to give it a little bit of time.
It's not going to be one or two days. It takes a little bit of time to create this.
What you're looking for is just the overall volume and trend and the behavior of the stock to be able to see is that the bottom is created. Otherwise, you could be creating a double top, a triple top. It could be rolling over. This could also turn into a triangle pattern sometimes.
Just be careful with that as well and then again you could roll over. That's why the entry points are usually above that resistance level. Give it a little bit of room to break back out and confirm it with some volume.