In our previous write-up, we discussed the double top chart pattern with a current example of Manappuram Finance. Today let’s focus on the double bottom pattern which is quite important like the double top. These patterns are one of the most commonly found patterns in the stock market. Though there are thousands of patterns and indicators under technical analysis, you need to have work with few of them. All you have to know is the accurate situation to apply them properly. Now, let’s move on to the main topic “Double Bottom Pattern Rules”.
Double Bottom Pattern Rules
As the name implies, the double bottom pattern consists of two bottoms, looks like the letter “W”. It comes after a prolonged bearish trend, highly considered as bullish reversal chart pattern. In order to form the specific pattern downtrend reversal is necessary. After a prolonged downtrend, there is a short-term reversal to the upside, creates its first bottom. Shortly after forming the first bottom, the price rebound a little and creates the neckline. Subsequently, in the second phase, the price move back towards the support created by the first level and rallies to the neckline again. This formation looks like “W” like chart pattern, refers to the double bottom.
To clarify the lesson more easily, we are going to discuss the characteristics of the double bottom pattern.
- The formation of the pattern begins after a prolonged downtrend.
- Firstly, the market pulls back up to 10% to 20% and creates a neckline.
- After formation of the first bottom, there will be another bottom to the support level of the first one.
- Though the difference between two bottoms can be higher in higher time frame chart, generally, it is not more than 2% to 3%.
- When price breaks the middle peak or valley between two bottoms, refers to neckline breakout process.
- You have to wait until the price breaks the neckline, buy stocks at the breaking point or wait for the next support level, otherwise, if any mishap happens, you may suffer loss.
- It is not an overnight formation, you have to wait for the mid-term or long term.
Moving forward, we are going to place an example of a current double bottom scenario of LUPIN.
After a long bearish trend, the formation of double bottom begins. As we can see here that the price breaks the neckline at near about Rs. 818 and completes the pattern. The neckline breakout indicates a high possibility of an uptrend in next few months. After breaking the price level, next possible resistance level will be at Rs. 960 as well as Rs. 1065. If investors work with a stop loss of Rs. 750 and target at Rs. 1000, just after the 2nd supporting point, it could be beneficial for them.
One of the main reason behind the pattern can be due to oversold stocks. As one of the main double bottom pattern rules is to reverse the trend, it is advisable to buy stocks at the current market price as soon as possible and book your profit near to the resistance. Hold them until the target is achieved or carry forward future contracts if necessary.
Categories: Trading Strategy