The Big W
|Double Bottoms provide visual
reference points that map the entire reversal process.
Once located, these signposts identify most key price pivots and
flash early warning signals when violated. The most common of
these, The Big W, begins at the last major high printed by a
downtrending stock, just prior to the first bottom. The first
bounce after this low creates 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 bottom low. At this
moment the trader 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 develops where
price violates the last low by a few ticks and then prints a
sharp move back above support. Should any or all of these events
occur, we mark the potential second leg on our Big W.
|Trade entry can be initiated
aggressively near the bottom of the second leg if the bells ring
loudly. The top of the shorter move marking the
partial retracement of the last downward impulse (middle of the
W) now becomes our main pivot price for analysis and further
trade entry. For price to successfully return to this point, it
must retrace 100% of the last fall (from the second low). This
finally breaks the lower high, lower low bear cycle. In strong
DBs, price will quickly surge to this price right off the second
A less aggressive long position can
be entered when this new impulse retraces strongly through 62%
of the fall into the second low. However, if a
short-term exit is desired, sufficient profit potential must
exist between the entry and the pivot price for this trade to
make sense. Longer-term traders can hold positions as price
mounts this pivot. At this point, it will often pause to test
support. However, another upward leg is then expected.
Price returning to the height of the
middle of the Big W has a very high probability of surging
beyond this point. Under normal conditions, it can
easily retrace 100% of the original downward impulse, completing
both the DB and Big W patterns. This tendency allows for further
entry at the expected return test to the pivot point after the
second surge has begun. The TIG chart provides an excellent
example of this second chance opportunity.
|In 1996, property-casualty
carrier TIG Holdings charted a double bottom volatility
ride uncommon in insurance stocks. As price emerged from
a small but powerful Turtle Reversal, it faithfully
completed a classic double bottom variation: the outline
of the letter W.