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.

ADM double bottom

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.

SEE: The Anatomy Of Trading Breakouts

GRMN double bottom

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

IPG double bottom

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.

PCG double bottom

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.

Related Articles
  1. Chart Advisor

    Big Double Top Patterns On the Verge of Breaking

    These stocks have created big double top chart patterns, and are on the verge of breaking the patterns to the downside--a bearish signal.
  2. Chart Advisor

    Gold Struggles to Climb Higher and May Fall Soon

    Traders will be watching the price of gold over the coming weeks. We'll take a look at how a couple major moving averages are suggesting that the next move could be lower.
  3. Technical Indicators

    Use Market Volume Data to Determine a Bottom

    Market bottoms often carve out classic volume patterns that let observant traders make fast and accurate calls.
  4. Charts & Patterns

    Understand How Square Works before the IPO

    Square is reported to have filed for an IPO. For interested investors wondering how the company makes money, Investopedia takes a look at its business.
  5. Trading Strategies

    Who Actually Trades or Invests In Penny Stocks?

    Although penny stocks are highly speculative, millions of people trade them daily. Here are 10 different types who do.
  6. Chart Advisor

    4 Stocks Still Flashing Buy Signals

    In the midst of volatility and a big market sell-off last week, these stocks are flashing buy signals.
  7. Technical Indicators

    Understanding Trend Analysis

    Trend analysis is the use of past performance to predict future price movement of a security.
  8. Trading Strategies

    How To Buy Penny Stocks (While Avoiding Scammers)

    Penny stocks are risky business. If want to trade in them, here's how to preserve your trading capital and even score the occasional winner.
  9. Investing Basics

    5 Things to "Deliberately" Do to Improve Your Trading

    Most traders are putting in trading hours, but not improving. Here are deliberate steps that can take your trading to the next level.
  10. Chart Advisor

    Stocks to Short...When the Dust Settles

    Four short trades to consider, but not quite yet. Let the dust settle and wait for a pullback to resistance for a higher probability trade.
  1. Fintech

    Fintech is a portmanteau of financial technology that describes ...
  2. Indicator

    Indicators are statistics used to measure current conditions ...
  3. Intraday Momentum Index (IMI)

    A technical indicator that combines aspects of candlestick analysis ...
  4. Mass Index

    A form of technical analysis that looks at the range between ...
  5. Money Flow Index - MFI

    A momentum indicator that uses a stock’s price and volume to ...
  6. On-Balance Volume (OBV)

    A momentum indicator that uses volume flow to predict changes ...
  1. Tame Panic Selling with the Exhausted Selling Model

    The exhausted selling model is a pricing strategy used to identify and trade based off of the price floor of a security. ... Read Full Answer >>
  2. Point and Figure Charting Using Count Analysis

    Count analysis is a means of interpreting point and figure charts to measure vertical price movements. Technical analysts ... Read Full Answer >>
  3. What assumptions are made when conducting a t-test?

    The common assumptions made when doing a t-test include those regarding the scale of measurement, random sampling, normality ... Read Full Answer >>
  4. How are double exponential moving averages applied in technical analysis?

    Double exponential moving averages (DEMAS) are commonly used in technical analysis like any other moving average indicator ... Read Full Answer >>
  5. How do you know where on the oscillator you should make a purchase or sale?

    Common oscillator readings to consider making a buy or sale are below 20 or above 80, respectively. More aggressive investors ... Read Full Answer >>
  6. What are the alert zones in a Fibonacci retracement?

    The most commonly used Fibonacci retracement alert levels are at 38.2% and 61.8%. A 50% retracement level is also commonly ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!