What is a Double Bottom and What Might it Mean for Stocks?

Tom Gentile

Posted in
Technical Analysis

By: Tom Gentile
October 17th, 2022

2 mins read

In the world of technical analysis one of many things to analyze is where a market may top or bottom out. Once one can determine a place where that may happen they can initiate trades (and / or investments) that could benefit with a move from that top or bottom.

What will be shown today is a chart on the SPY, which is the ETF I use to represent US equities. I see a potential market bottom for now in SPY. This does not guarantee it will work out and be that, but the chart shows a pattern that signifies it could be or become one, (a market bottom).

W Pattern or what’s deemed a Double Bottom Pattern

A double bottom is a technical situation where the price of a security hits a low price. It bounces from there for a bit only to retraces and hit that price / price area a second time.

Should the security bounce from that price yet again that creates the double bottom or ‘W’ formation.

This is deemed bullish and may indicate that the bears took the price of that security down to that double bottom price and failed to push it lower than that twice.

This may be the signal the bulls on that security need to see to gain even more confidence to put their money to work on that security, which in turn should drive prices higher.

Figure 1: W Bottom on SPY
Figure 1: W Bottom on SPY

The “W’ bottom pattern would be a more ideal pattern if the bottoms were parallel or the same price.

An even more bullish ‘W’ bottom pattern would be where the most recent bottom, the one on the right, is at a higher price than the first one in the pattern, or the one on the left.

Assessing a Target Price on a Stock in a ‘W’ Bottom Pattern

Should the pattern play out and bring about higher prices for the security, in this case the SPY, the most recent upside pivot high could be considered an initial price target.

In the case for SPY that would be just under 380 as highlighted by the horizontal, green, dotted line in Figure 1.

After that it could go to the prior pivot high before that which can be seen at just under 390.

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