Chart patterns shaped as a W, called double bottom, are of interest to many traders as they often suggest that a trend reversal is near. This is what we’ll explain in more detail in this article dedicated to the “double bottom” chart pattern.
Indeed, financial markets (which include stocks, commodities and cryptocurrencies) don’t always go up or down in a straight line. At times, prices can take on an entirely new direction. When this occurs, it’s known as a trend reversal.
For example, Amazon’s share price rose over $100 during the dotcom bubble of the 1990s, before collapsing to $3 per share in the following two year. A trend reversal occurs when prices stop rising, and start falling over time.
Interestingly, the pattern known as a “double bottoms” suggests that a trend reversal is near. A double bottom occurs after prices have fallen considerably, formed a bottom in the form of two lows, and have started a new uptrend.
After a sharp drop, a share price rarely experiences a V-shaped recovery, rising again in a straight line. Instead, sellers first need to stop selling and buyers need the confidence to step back into the market. This can take time, as bear markets are gruelling and can drain a lot of buyers’ confidence.
Market psychology is reflected in the double bottom’s W-shaped pattern.
- The left left of the W markets a sustained fall in price, which is a continuation of a downtrend.
- The first rebound marks a temporary easing of selling pressure, and a first attempt at regaining confidence.
- However, the rebound is short-lived as sellers overwhelm buyers and the price traces down again.
- The price then forms a new low, roughly in line with the prior one, as sellers are purged from the market. This is the second low of the W.
- Only then can new bull-run start, as buyers outnumber sellers. The price advance completes the W pattern.
If you’d like to see this pattern in action, take a look at this free chart patterns PDF. It discusses 20 commonly occurring chart patterns that every trader should learn to recognise. These include bullish patterns like flags and pennants, as well as more ominous ones like the “double top”.
When analysing chart patterns, you should always be mindful of the broader context. A stock may rise for technical reasons, but you should always consider whether the broader macro-economic environment is supportive. If interest rates are rising or central banks are tightening monetary policy, stocks are more likely to fall than rise.