DOUBLE AND TRIPLE BOTTOMS

By Daryl Guppy

These are trend reversal signals found at the end of a trend. They do not occur in the middle of a downtrend. Use this simple test. Open a chart and show 123 months of price activity. The double, or triple bottom on the right of the chart should be lower than any previous price activity shown on the left of the chart. These bottom patterns form as new 12 month lows.

Here we concentrate on the ‘double bottom’.  The classic double bottom has quite precise construction rules, and these deliver a very high probability of successfully selecting the future direction of price. Other double bottom rules are less rigid, and have a lower level of probability. Which rules you decide to use will determine how reliable the double bottom is as an indicator.
A single bottom in a falling trend is the pivot point at which the trend reverses direction. In trend terms this is the pivot point low . This absolute low price is a useful reference point and many traders try to buy as close as possible to this to make good money as the trend develops. Many strong trends do develop from single point bottoms but many single point bottoms precede weak trends.
Sometimes prices rise and then fall back again to re-test the low. This is the beginning of a potential double bottom. When the pullback in prices is exactly equal to the earlier single point low, or is within a few cents, we label it a double bottom. This is a powerful signal when the two bottoms are separated by several weeks. It is still a powerful signal when separated by just a few days, but the reliability is reduced.
RULES
The rules for a classic double bottom  are quite definite and are designed to eliminate look-alike patterns of no significance that occur in trending securities. Some traders modify these, accepting a pattern where prices are almost the same, or within 3%. This stretches the classic rules and reduces the reliability of this pattern.

Significant double bottoms occur in securities with strong trends. The first bottom is a significant and clear low.
Triple bottoms  are constructed in the same way as double bottom  patterns. The triple bottom includes another failed rally with a price retreat to the same levels, followed by another up trend. Although many traders feel these triple patterns are more reliable, they sometimes signal the start of a channel trading opportunity. Cautious traders wait for the trend break from these triple patterns to be fully confirmed before taking action.