Double Bottom Formation

Double Bottom Formation on stock charts indicates that the trend of that stock is getting ready for a major reversal. Double bottoms, in contrary to double tops, are always considered bullish. When this pattern appears on a chart, a Forex, Stock, Commodity or an Index, it signals a major change of the trend of that particular security from bearish to bullish.

There are two major times when this pattern can appear. During a major downtrend which signals the reversal of the trend and during an uptrend which indicates a continuation of the current bullish trend.

Most people define the double bottom formation as the reversal trend only and recognize it as such only at the end of a current bullish trend. However true this may be, you must be able to understand the double bottoms even if the current trend is bullish. Double bottoms during an uptrend are usually referred to as “Short term double bottom formation,” or as I’d like to call them “W” formation.

So how do you identify a double bottom formation? Well it is not as hard as it sounds. Here is a scenario:
The stock moves down and then it establishes a low price. After that, the stock bounces and creates the first leg of the double bottom formation. I call that the formation of a “V” or half of the “W.” After the first leg of the “W” formation is created the stock pulls back and this time it creates a higher low. What this means is that the second low of the “W” formation is higher than the first leg. Think of it as a “crooked W” with the second leg being higher than the first one. Here is an example. (We’ll look at actual charts in a minute here…

You see what I am getting at? This however is a perfect double bottom formation. Such formations are NEVER this cut and dry on a real stock chart. It takes some eye training to spot these formations. Let’s take a look at this chart of S&P 500 (April – June 2005)

As you can see double bottom is highlighted with red circles. The second leg of the “W” formation always has to be higher than the high of the “V” formation which we described above.
I would also like to point out that in the above chart, you can notice another “W” formation in what seems to be a trend change. Look at this chart below:

So at this point, all you need to remember is that the Double Bottom Formation is always a bullish signal and that the Double Bottom Formation can be spotted at the end of a bearish trend, which indicates a reversal of the trend from bearish to bullish, and additionally it can appear in a middle of a bullish trend indicating a continuation of the trend.