Thursday, January 24, 2008

Double Bottom

Great comment on my "Capitulation" piece last night from reader "Fat Bottom Boy". He asks, "How often is a double bottom turn around formed in 2 consecutive trading days? Not so sure."

I did a little research and found info on the size and tempo of "double bottoms" on the website

Analysts vary in their specific definitions of a double bottom. According to some, after the first bottom is formed, a rally of at least 10% should follow. That increase is measured from high to low. According to Edwards and Magee, there should be at least a 15% rally following the first bottom. This should be followed by a second bottom. The second bottom returning back to the previous low (plus or minus 3%) should be on lower volume than the first. Other analysts maintain that the rise registered between the two bottoms should be at least 20% and the lows should be spaced at least a month apart. Generally, the longer the time between the two lows, the more important the pattern as a good reversal. Schabacker warns investors off of a pattern where only a few days intervene between the two lows. Bulkowski suggests that best gains come from formations where bottoms are approximately 3 months apart.

So, maybe "fat boy" is right. This was too quick for a double bottom. Only time will tell. As a bull you are hoping it was a double-bottom. As a day-trader, it doesn't matter, because we should be good for a 10% move to the upside. Day-traders just need to ride the current wave in the right direction.

As the days progress, I will try to find more info on the technical analyses of the market and let you know what direction we are headed in.

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