Price marks territory as it spikes relative highs and
lows within all time frames. Skilled traders observe
this signature behavior throughout all markets and all
historical charting. Relative direction also
characterizes price movement. A series of lower lows and
lower highs identify downtrends while uptrends print a
sequence of higher highs and higher lows.
||As bulls and bears fight for control, Pattern Cycles are
born. Since markets won't travel upward to infinity or
downward below zero, identifiable swing trades appear
within each time frame. Driven by emotional behavior,
trend inhales and exhales. Falling price ignites fear as
paper profits evaporate. Fresh rallies awaken greed,
inviting momentum players to become greater fools. On
and on it goes.
|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
bottom takes longer to form than the sharp Adam
spike. Look for volume to decrease as the stock
heals and prepares for a new uptrend. Adam and
Eve formations aren't limited to bottoms. Watch
for them at the end of parabolic rallies.
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
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 center 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.
|The Big W pattern
can be identified in all time frames and all
markets. It is a powerful tool for locating
bottom trade entry.
The Big W reference pattern maps the entire bottom
reversal process. This signpost identifies key pivots
and flashes early warning signals. The pattern begins at
a stock's last high, just prior to the first bottom. The
first bounce after this low marks the center of the W as
it retraces between 38% and 62% of that last downward
move. This rally fades and price descends back toward a
test of the last low. The smart trader then listens
closely for the first bell to ring. A wide range
reversal bar (doji or hammer) may appear close to the
low price of the last bottom. Or volume spikes sharply
but price does not fail. Better yet, a Turtle Reversal
prints where price violates the last low by a few ticks
and then bounces sharply back above support. When any or
all of these events occur, focus your attention on the
second leg of this Big W.
Aggressive traders can initiate entry near the bottom of
this second leg when the bell rings loudly. The middle
of the W now becomes your pivot for further execution.
For price to jump to this level, it must retrace 100% of
the last decline. This small move finally breaks the
falling bear cycle.
Enter less aggressive positions when this emerging
second bottom retraces through 62% of the fall into the
second low. But sufficient profit must exist between
that entry and the W center top for this trade to work.
Longer-term traders can hold positions as price pierces
this pivot. Be patient since price will likely pause to
test support here.
Then expect another upward leg. Price at this level has
a high probability of moving even higher. It can easily
retrace 100% of the original downward impulse,
completing both the Double Bottom and Big W patterns.
This tendency allows for further entry at the first
pullback to the center pivot after the next break.