A bottom is the lowest price reached by a financial security, commodity, index or economic cycle. Often, a specific time span is used to determine a bottom, and that timeframe can be a year, month or even intraday.
A bottom can help an investor or technical analyst to gauge the trading range for a security which can provide guidance for security valuations. Technical analysts usually study the entire history of a security’s price movements, short-term trading levels and a security’s trading volume when seeking to determine a future price.
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. Often a bottom can be a signal for a reversal. Investors often see a bottom as an opportunity to purchase a stock when the security is underpriced or trading at its lowest value. In technical analysis, a bottom is identified as the lowest level of support when charting a security.
Most technical analysts use channel trading systems which chart resistance and support levels for a security over time. Two of the most common price channels include Bollinger Bands and Donchian Channels. Trading channels can be helpful in predicting and also detecting a bottom since bottoms usually occur at or near the support levels in a channel charting system. As such, bottoms are also typically a signal for a reversal.
A single bottom followed by a reversal will often form a U-shaped pattern. These patterns may also be called a rising or ascending bottom. This is a trading pattern with a bottom that follows with stair steps that move upward over time. In a rising bottom, the stock gradually begins a bullish trend higher. This pattern is a popular buy signal for many traders.
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. Most traders are aware of a security’s bottom trading level and are cautious of double bottoms. Securities rebounding from bottom levels may return to the bottom price level several times.