DEFINITION of 'Bottom'
A bottom is the lowest price reached by a financial security, commodity, index or economic cycle in a given time period. A specific time span is usually used to determine a bottom, and that timeframe can be a year, month or even intraday. To determine the future price of an investment, technical analysts determine the bottom for a particular security.
BREAKING DOWN 'Bottom'
Technical analysts study the history of a stock’s price movements and trading volume to determine the future prices of securities. Because they believe price movements are trends and not simply random occurrences, these analysts use dozens of price patterns to decide if a stock should be bought or sold. Technical analysts look for breakouts, which occur when the stock price trades above or below a recent price trend.
How a Bottom Is Used by Investors
If a stock has bottomed out, it means the stock reached its low point and could be in the early stages of an upward trend. Investors see a bottom as an opportunity to purchase a stock when the security is underpriced. In technical analysis, a bottom is identified as the lowest level of support when charting a security.
Examples of Bottom Trading Patterns
A double bottom is a trading pattern in which a stock drops in price and then rebounds twice during a specific period of time. Say, for example, the price of XYZ common stock drops $5 per share to $20 and then rebounds to $26. Three weeks later, the stock again drops to a price near $20 per share and rebounds again, which creates a stock price chart that looks like the letter “W.”
Technical analysts refer to the $20 price as a support level, and they believe the stock price will advance after the price decline. Analysts also look for rounded bottom price trends, in which the price chart looks like the letter “U.” The lowest point on the “U” shape is also considered a support level. A rising, or ascending, bottom is a trading pattern that looks like stair steps that move upward over time. The stock price trades downward and rebounds, but each downturn has a slightly higher price support level. Assume, for example, the XYZ stock has a support level of $20 before rebounding and then drops to a new support level of $25 per share. When technical traders see a rising bottom, they consider the trend to be a buy signal for the stock.