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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 up trends 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 wrong.
Eve's rounded 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
upside.
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.
