Bottoms:
Bottoms exist as a direct result of this trend physics. The natural movement of impulse
and reaction dictates that two unique formations must develop at some point within each
Pattern Cycle. In an uptrend, a lower high must eventually follow a higher high and mark
a new top. In a downtrend, the sequence of lower lows ends when
price prints a higher
low. This second event marks the birth of the Double Bottom.
Double bottoms draw their predictive power from the trends that precede them. As a
series of lower lows print on a bar chart, downtrends often accelerate. The trading crowd
notices and develops a gravity bias that expects the fall to continue unabated. Then
suddenly the last low appears to hold. The crowd takes notice and bottom fishers slowly
enter new positions. Price stability then triggers more and more players to recognize the
potential pattern and jump in.
Stock percentage growth potential peaks at the very beginning of a new uptrend. For this
reason, being “right” at a bottom can produce the highest profit of any trade. But picking
bottoms can be a very dangerous game. Smart traders weigh all evidence at their disposal
before taking the leap. And strict
risk discipline must still be exercised to ensure a safe
exit if proven wrong.
The Adam and Eve Reversal illustrates the importance of the center peak in the creation
of Double Bottoms. A very sharp and deep first bottom (Adam) initiates this DB pattern.
The stock then bounces high into a center retracement before falling into a gentle, rolling
second bottom (Eve). Price action finally constricts into a tight range before the stock
breaks strongly to the upside.
Many times the top of Eve prints a flat shelf that marks an excellent entry point. Shelf
resistance typically develops right along the top of the cent er retracement pivot. The
relationship between this center pivot and current price marks an important focal point as
the skilled trader closely watches the development of a suspected double bottom pattern.
Since bottoms occur in downtrends, risk must be managed defensively. The greedy eye
wants to believe the immature formation and is easily fooled. Even spectacular reversals
offer little profit if price can’t ascend back out of the hole it found itself in. When
choosing stop and exit points, violation of a prior low is the natural first choice. Make
certain your entry permits you to exit for an acceptable loss at this location. And don't
stick around long. Price will gather downside momentum quickly at broken lows as it
searches for new support.
Successful bottom entry takes a strong stomach. Even when all the technicals line up,
sentiment will be highly negative at these turning points. The potential for short-term
profit though is outstanding. In addition to other longs ready to speculate on a good
upside move, high short interest will fuel explosive impulses off these levels. Perhaps for
this reason alone, serious traders can’t ignore double bottom patterns.
Breakouts:
Significant declines evolve into long bottoms characterized by failed rallies and retesting
of prior lows. As new accumulation slowly shakes out the last crowd of losers, a stock's
character changes. Prices push toward the top of key resistance. Short-term relative
strength improves and the chart exhibits a series of bullish price bars with closing ticks
near their highs. Finally the issue begins a steady march through the wall marked with
past failures.
Stocks must overcome gravity to enter new uptrends. Value players build bases but can’t
supply the critical force needed to fuel rallies. Fortunately, the momentum crowd arrives
just in time to fill this chore. As a stock slowly rises above resistance, greed rings a loud
bell and these growth players jump in all at the same time.
The appearance of a sharp breakout gap has tremendous buy power. But the skilled trader
should remain cautious when the move lacks heavy volume. Bursts of enthusiastic buying
must draw wide attention that ignites further price expansion. When strong volume fails
to appear, the gap may fill quickly and trap the emotional longs. Non-gapping, high
volume surges provide a comfortable price floor similar to gaps. But support can be less
dependable, forcing a stock to swing into a new range rather than rise quickly.
Fortunately this scenario sets up good pullback trades. The uptrend terrain faces
predictable obstacles marked by Clear Air pockets and congestion from prior
downtrends. These barriers can force frequent dips that mark good buying opportunities.
The trader must identify these profitable zones in advanc e and be ready to act.
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