This week I thought we could look at Double Bottoms.
A double bottom is generally considered to be a medium to longer term price reversal pattern.
It is still a valid pattern on smaller timeframes, however the success rate can sometimes fall away considerably as timeframes reduce.
Double Bottoms are an A-B-C-D pattern and occur when price forms a low pivot and draws out enough support to cause price to rise, then price comes back and re-tests the initial low, where the support is confirmed and in response price accelerates higher.
The general shape of this pattern is a large 'W'.
There are some different interpretations of Double Bottoms around the traps, and classic analysts will often discuss 'Adam' bottom pivots and 'Eve' bottom pivots. These terms refer to the actual shape of the low pivots, where an Adam bottom is generally a sharp, thin 'V' shaped low pivot, and an Eve bottom is a broader and wider pivot low. A double bottom can then be identified into four types - Adam-Adam, Adam-Eve, Eve-Adam & Eve-Eve. Once identified the double bottom success and failure rates are then considered, although the different rates are not massively different from each other (FWIW Eve-Eve has the lowest failure rate, and the highest success rate, but not by very much).
Personally I am not so concerned with the shape of the low pivots, I just prefer to see the point 'A' being at least twice the height of 'B-C' (and preferably a little more), and then I study the volume pretty closely. I want to see signs of strong support (buying) coming in, preferably followed by an obvious reduction in selling pressure. Following that I want to see price being supported as it breaks out (the breakout is generally considered to occur when price accelerates above pivot 'C'.
The Initial price target is generally considered to be double the height of 'C-D' (200%), this is called the equality target.
Many traders however, use these same pivots to project a series of price targets using Fibonacci extensions.
The example below sees an Eve - Adam double bottom. You can see that point 'A' is easily more than double the height of 'B-C'. In this example the higher volumes which represent more serious support came in on the second low, however the volumes can be either way around, so long as they are supportive. The very large 'W' shape of the structure can easily be seen, and the increased support can also be seen as price breaks out.
