A double bottom is a long or short-term pattern where two major low points in the price of a stock reaches approximately the same level. The two price lows are separated by a rally, which when exceeded marks the end of the pattern and a bullish prospect for the stock. Four stocks are very near breakout levels, or have already broken out, providing a profit target for the upside move which could develop.
SEE: Trading Double Tops And Double Bottoms
Archer Daniels Midland Company (NYSE:ADM) dropped to $25.02 in August, rallied to $29.23 by October and then collapsed in November to $24.38. These are the three important prices of a double bottom. While the lows didn't reach a similar level, overall the pattern is visible on a chart and therefore tradeable. A rally above $29.23 indicates buying interest has picked up to its highest level in months, and could push the stock to the target of $33.25 to $33.75. This key high has already been breached in 2013, so the target is now in play. Stops can be placed below either of the major lows, or just below support at $26.90. The lower the stop the greater the risk, but the trade has a slightly lower chance of getting stopped out.
Garmin Ltd. (Nasdaq:GRMN) reached a low of $35.55 in July and then $35.77 in November, creating a potential double bottom. Between the two lows the stock reached a high of $43.33 in October, which is breakout level to watch. A rally above that high indicates further bullishness is likely to follow, with a price target near $50. The $50 target is right near where the stock faltered on price peaks in February and May. If the breakout occurs, the safest stop level is below $35.55, but that is not a very appealing risk/reward ratio (about 1:1). Alternatively, a stop can be placed below the December low of $39.72, which has less risk exposure, a higher reward for the risk but also a greater chance of being stopped out.
The Interpublic Group of Companies (NYSE:IPG) had extreme lows at $9.04 in July and $9.38 in November that marked a potential double bottom for this stock. The upside breakout point is $11.94, which is the high of the rally that occurred between the two lows. Over the last year though the stock has been in a range, with the high being $12.17, therefore, waiting for the stock to exceed this level has a higher chance of success. If exceeded, both the range and double bottom will be completed, indicating a profit target between $14.25 and $15.25. A stop can be placed below major support at $9.04 or $9.38, which isn't likely to be hit, but has a high risk exposure relative to profit, or a stop can be placed just below minor support at $10.50.
SEE: Support & Resistance Basics
PG&E Corp. (NYSE:PCG) has a smaller potential double bottom than the former stocks mentioned. The lows from November and December are $39.60 and $39.40, with the rally in between reaching $41.92. Closing at $40.67 on January 8, the stock is still a ways away from the breakout point, but warrants attention if it moves closer. A push above $41.92 indicates a move to roughly $44. Stop locations include just below $39.40, $39.60 or $40.20; the former stops are less likely to be hit, but the latter has lower risk exposure for the potential reward.
The Bottom Line
Double bottoms are a fairly common pattern, occurring on all timeframes. When the rally high between the two similar lows is exceeded, it indicates a more bullish activity is likely. Usually there are two or three price areas to place a stop level, and the risk tolerance of the trader will need to determine where the best location is. One problem with the pattern is that double bottoms may end up just being choppy trading ranges, resulting in multiple failed breakouts and losses. Double bottoms are quite easy to spot though, and when a breakout does occur the trades can be quite lucrative.
Charts courtesy of stockcharts.com
At the time of writing, Cory Mitchell did not own any shares in any company mentioned in this article.