Green Shoots In The Form Of Double Bottoms?

By Joey Fundora | July 20, 2010 AAA

While I've been fully expecting the markets to continue lower for at least one more leg down, I remain open to the possibility that they could throw me a curve ball or two. It's hard to remain objective in the face of index charts that are looking so terrible, but in reviewing some charts I came across a few stocks that could be completing small double bottoms, hinting that their corrections may soon be over.

A double bottom typically resembles a "W" and forms after a downtrend. Typically, a low is formed and then the stock bounces higher before coming back to retest the first low. The important point to remember is that a double bottom is not valid until the price closes above the center peak of the "W", also known as the neckline. (For related reading, see Analyzing Chart Patterns: Double Top And Double Bottom.)

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Oracle (Nasdaq:ORCL) is a good example of a stock that recently cleared the neckline of a small double bottom. While the left side of the base was a little choppy, the overall price action follows the pattern in principle. After a decline, ORCL attempted to rally reaching just over $23.50. It pulled back from this level and retested its prior lows near $21.50. It then rallied sharply to clear its June high and the neckline from the pattern. ORCL is now in the process of testing the neckline as support. If it can hold here, especially in the light of a negative IBM (NYSE:IBM) earnings report, it could rally to its projected target near $25.50.

Source: StockCharts.com

AGCO Corporation (NYSE:AGCO) is another stock that recently cleared the neckline of its double bottom. This is important, because the pattern is not valid until the neckline is cleared. Many traders incorrectly assume that since it looks like a "W", that it's a double bottom. But until the neckline is cleared, it is only a potential double bottom. The reason this is important is that in the process of clearing the neckline, the stock is also forming a higher high. This shows strength on the part of bulls as the stock was able to climb above prior selling pressure. The level to watch for AGCO here is the neckline area near $30. If it falls below this area it could signal a failed pattern. A move above would project toward $34.

Source: StockCharts.com

Suntech Power Holdings (NYSE:STP) also broke the neckline of a small double bottom and has been holding above this level for a couple of weeks. While the near-term pattern looks pretty strong, traders should not lose sight of the fact that STP remains in a longer term downtrend. The projected target for this base would carry STP back up toward strong resistance. This doesn't mean there isn't a possible trade here, as long as traders understand that the immediate upside may be limited.

Source: StockCharts.com

Citrix Systems (Nasdaq:CTXS) is a good example of a stock that is in a potential double bottom. Notice how CTXS bounced toward $47 in June and then pulled back to retest its lows a few weeks later. Even though CTXS was able to get above the neckline, it couldn't hold this level on a closing basis. Some early traders were likely caught trying to catch the breakout, so CTXS must also now overcome another level of resistance. However, if CTXS can get back above $47, it could spark a rally that would carry it to multi-year highs.

Source: StockCharts.com

Bottom Line
While overall the markets are still looking sick, traders must remain objective in analyzing the patterns they see. Even though it may not make sense to see some stocks possibly bottoming, the charts don't lie and traders should at least accept the possibility of some near-term strength. There is also the possibility that these patterns will fail, and while that may be disappointing to traders in these stocks, this too would be valuable information for the astute trader. A break back beneath these bases would trap anyone buying the possible bottom and will surely lead to increased selling pressure.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Joey Fundora did not own shares in any of the companies mentioned in this article.

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