As of 08/20/2019
  Indus: 25,962 -173.35 -0.7%  
  Trans: 10,006 -75.35 -0.7%  
  Utils: 834 -1.95 -0.2%  
  Nasdaq: 7,949 -54.25 -0.7%  
  S&P 500: 2,901 -23.14 -0.8%  
YTD
 +11.3%  
 +9.1%  
 +17.0%  
 +19.8%  
 +15.7%  
  Targets    Overview: 08/15/2019  
  Up arrow27,200 or 24,900 by 09/01/2019
  Up arrow10,700 or 9,550 by 09/01/2019
  Up arrow850 or 790 by 09/01/2019
  Up arrow8,200 or 7,400 by 09/01/2019
  Up arrow3,000 or 2,750 by 09/01/2019
As of 08/20/2019
  Indus: 25,962 -173.35 -0.7%  
  Trans: 10,006 -75.35 -0.7%  
  Utils: 834 -1.95 -0.2%  
  Nasdaq: 7,949 -54.25 -0.7%  
  S&P 500: 2,901 -23.14 -0.8%  
YTD
 +11.3%  
 +9.1%  
 +17.0%  
 +19.8%  
 +15.7%  
  Targets    Overview: 08/15/2019  
  Up arrow27,200 or 24,900 by 09/01/2019
  Up arrow10,700 or 9,550 by 09/01/2019
  Up arrow850 or 790 by 09/01/2019
  Up arrow8,200 or 7,400 by 09/01/2019
  Up arrow3,000 or 2,750 by 09/01/2019

Bulkowski's Double Bottom Setup

 

My book, Encyclopedia of Chart Patterns Second EditionEncyclopedia of Chart Patterns 2nd Edition book., has several chapters on double bottoms (depending on their Adam and Eve configuration). If you want more information on chart patterns, considering buying a copy of the book. There's not a better reference on chart patterns. The book is pictured on the left.

If you click on the above link and then buy the book (or anything) while at Amazon.com, the referral will help support this site. Thanks.

-- Tom Bulkowski

$ $ $

The double bottom setup says that throwbacks which do not plunge below the confirmation price suggest better performance after the breakout.

Overview
Details
Trading Tips
Methodology
Example
See Also

Double Bottom Setup Overview

The ideal double bottom chart pattern setup
The idea double bottom setup

I found this setup when doing research on stop placement. I noticed that price after the double bottom breakout climbed higher if the throwback did not plunge very far below the confirmation price. Statistical research into this behavior confirmed the findings.

Double Bottom Setup Details

The above chart shows the ideal setup. A double bottom appears at points 1 and 2. Price breaks out and confirms the double bottom as a valid chart pattern when price closes above the red line. Then, the throwback occurs and returns the stock to the breakout price within a month of the breakout. In this example, price touches the red confirmation line and then lifts off, making a nice move up after that.

Although the rise in many cases after a double bottom is not as clean as it appears in the above figure, research suggests that when price does not drift below the red confirmation line, it predicts (but does not guarantee) a better performing double bottom.

A bad double bottom chart pattern setup

Contrast the ideal trading setup with this one. A double bottom appears at points 1 and 2. Price confirms the chart pattern when it closes above the red confirmation line.

In this situation, notice that the throwback at A drifts below the red confirmation line, suggesting a weaker trading setup. Price climbs to a post-throwback high at B before continuing the decline to C. This is the type of double bottom setup you will want to avoid.

Double Bottom Setup Trading Tips

To trade double bottoms, consider the following suggestions.

Double Bottom Setup Methodology

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I looked at the statistics from the four combinations of double bottoms separately and the following table shows the results.

Double Bottom TypeDrift for First FailureDrift for Best Average RiseBest Average RiseBenchmark Average RiseQualifying Samples
Adam & Adam-1.03%0%39%35%20/281
Adam & Eve-2.76%0%49%37%22/389
Eve & Adam-5.45%-3%40%35%49/227
Eve & Eve-4.23%-2%42%40%72/486

Let's take the Adam & Adam row as an example. I asked the question, how far below the confirmation price did the stock move before the chart pattern failed? By 'failed', I mean that price failed to rise more than 5% after the breakout before tumbling either below the bottom of the pattern or more than 20%.

For the Adam & Adam double bottom, price dropped 1.03% below the confirmation price during the throwback and that led to the first failure.

How far down, on average, must price drop below the confirmation price and still lead to the most powerful rally? For the Adam & Adam double bottom, a throwback that does not drop below the confirmation price led to a rally that saw price rise on average 39%. The average rise for all Adam & Adam double bottoms is 35% (the next column). The last column shows that 20 samples out of 281 samples were involved in the 39% rise.

The table shows that price can drift below the confirmation price (Eve & Adam and Eve & Eve double bottoms) by 3% and 2%, respectively, for the best average rise. This suggests the following trading rule: Only buy into double bottoms when the throwback plunge is shallow. By shallow, I mean price does not drop much (say, 0% to 2% or so) below the confirmation line.

Double Bottom Setup Example

A trading example of the double bottom chart pattern setup

The figure to the right shows another example of the ideal double bottom trading setup. Price during the throwback does not drift below the confirmation price.

Point Buy 1 shows where you would enter if you placed a buy stop a penny above the red confirmation line. That would get you in during the breakout. If you are lucky, price would not throwback and you would be set. For swing traders, buy at Buy 1 and sell when price rounds over at the top of the throwback. I show that as Sell 1, when price gapped lower.

A throwback followed, but in this case, it did not touch the red confirmation line. Price formed a pipe bottom on the daily scale (the upper left shows a zoom of this). The twin price spikes suggest a move higher and that is the entry signal. You can buy in at any time you are convinced that price is resuming the up move (resumption of the up move occurs 86% of the time). I show the entry as Buy 2. Price continues moving up.

-- Thomas Bulkowski

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See Also

 

Support this site! Clicking any of the books (below) takes you to Amazon.com. If you buy ANYTHING while there, they pay for the referral.

My novels:      New                  Bumper's Story Head's Law

Chart Patterns: After the Buy Getting Started in Chart Patterns, Second Edition Trading Basics Fundamental Analysis and Position Trading Swing and Day Trading Visual Guide to Chart Patterns Encyclopedia of Candlestick Charts Encyclopedia of Chart Patterns 2nd Edition Trading Classic Chart Patterns

Copyright © 2005-2019 by Thomas N. Bulkowski. All rights reserved.
Disclaimer: You alone are responsible for your investment decisions. See Privacy/Disclaimer for more information.
Some pattern names are registered trademarks of their respective owners.

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