Last week, we discussed all about the cup-with-handle base. Today, we will look at the double-bottom base. While its shape differs from that of a cup-with-handle, the core concepts and the backstory of double bottoms are the same.
Double bottoms tend to form while the overall market is volatile, and that's reflected in the shape. You have one down leg, then the stock tries to rally but hits resistance and ends up pulling back to form a second down leg. The stock rebounds one more time and is finally able to punch through and move higher. The breakout typically occurs when the overall market has also bounced back from a correction into a new uptrend.Like the cup-with-handle and all other bases, the buy point for a double bottom is 0–5% above the most recent area of resistance. That's the peak in the middle of the W. Breaking through that resistance on unusually heavy volume shows institutional investors are back in the game, aggressively scooping up shares.
Remember how the handle in the cup-with-handle shook out the weaker holders? You have the same concept here, just in a different place. Note how the bottom of the second leg in a double bottom undercuts the bottom of the first leg. That gets rid of the weaker holders, leaving more committed investors who create support for the stock's new run.
Prior uptrend: 30% or more
Base depth: 35% or less
Base length: At least 7 weeks. The first down week in the base counts as Week 1
Peak in middle of W: Should form in the upper half of base and should be below the left-side peak
Undercut: Bottom of the second leg down should be lower than the bottom of the first leg down
Volume on the day of breakout: At least 40–50% above average
Watch our webinar on "How to Read Charts With Skill And Identify Correct Buy Points"