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"Double Bottom" a definition

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A recent double bottom marks the reversal from a long-term downtrend to a budding up trend. In early September, WXYZ bottomed out at 2 dollars a share and skidded horizontally at this price level for a couple of weeks as volume dropped off to near nil. The end of September saw strong buying come in a wave that quickly elevated the stock to 3 dollars a share. Shares then dropped back to 2 dollars a share in early October but this occurred on lower volume. In particular, the selling that brought the stock to 2 dollars a share the second time around was less that the volume that brought the stock to this level the first time around. Volume here was also less than it was during the buying binge that came in between.

The lift-off from the second retest at 2 in mid October marks the exit from the double bottom reversal pattern and the beginning of a new trend. The requirements for a double bottom chart pattern are:

Step 1 - The formation of a low

Step 2 - A lift-off from this low that occurs on higher volume than in step 1.

Step 3 - A retest of the low made in step 1. The volume in this part of the move is lower than that of steps 1 and 2.

Step 4 - A lift-off from the second low that occurs on volume that is greater than the selling volume in steps 1 and 3.

As you can see, comparing the relative volume in each of these four waves is important. Charts help you in this effort by color coding the volume indicator graph. Up volume is dark and down volume is drawn in red. So steps 1 through 4 require you only to eyeball the height of each of these four stacks.

In volume terms, the above steps can be boiled down to:

Step 1 - big red stack

Step 2 - bigger black stack

Step 3 - smallish red stack

Step 4 - big black stack

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