What is a Double Bottom Pattern? It’s a “W”!

The Double Bottom pattern in stock technical analysis looks like the letter W. It is much less frequent than the cup and handle pattern but can be just as powerful. 

Key Takeaways

-W Pattern should have a lower dip on the right-side bottom

-Buy point is when the right side reaches the high of the middle of the “W”

-Breakout volume should be 50% above average or more, otherwise be cautious

Formation

The stock essentially forms a “W” on the chart, with the second part of the W dipping lower than the first. The second dip (or “bottom”) of the W pattern usually dips lower than the first bottom. This happens because some investors are still holding from the first dip and hoping it will not fall further… when it does, the nervous investors sell. This is what WallStreetBets Reddit calls “paper hands”.  At this point, all that is left are people holding for the long term, people with “diamond hands” -here’s to you WSB!. As new investors jump in on the newly affordable price of the stock, the price rises yet again. If there is enough volume from these new investors, the stock gains traction and can slingshot for massive gains

Image from Cabot Wealth. If you want a much more in-depth discussion on double bottom, check them out.


 

Buy Point

The key difference compared to a cup and handle is that the buy point is not the old record high we see on the left side (beginning) of the pattern. The buy point will be when the stock is on the way back up (on the right side of the W). As the stock passes the center of the W, this is the buy point. In the image below, you see the blue circled area is the buy point, as it is the same level as the top of the middle peak of the W.

Time Frame

The length of time for a double bottom to form successfully can vary greatly. The most successful patterns will take at least 7 weeks to build. As usual, the longer it takes to develop, the more likely a successful breakout will occur.

Warning Notes

-The volume on breakout day should be at least 50% greater than the average daily volume

-The second dip should have some trading lower than first dip to shake out weak investors

-The right side of the W should be steady upward trend. If the trend slows and moves sideways, it is likely to fail. The more “W” shape it is, the more likely it will succeed.

Additional Resources

If you prefer a video to explain his pattern, Investor’s Business Daily has created this excellent detailed explanation. It will provide even more detail if you really want to know everything about it:

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