The chart below depicting Great Eastern Shipping shows a typical double bottom formed in July and August. The two consecutive troughs with the intervening peak, resembling the letter ’W’ were formed as the stock made repeated attempts to decline below the key support at Rs 330 before reversing higher. The neck-line was drawn with the intervening peak as the reference point. The slightly higher second bottom is a positive as it reflects buying interest.
Note how the volume expanded while the stock price broke out above the neck-line of the pattern.
It is imperative to wait for the completion of a pattern in the form of a strong break-out above the neck-line with good volumes before acting on it for double bottom formations frequently fail and the previous down trend resumes with renewed vigour. The chart below of Hindustan Construction Company depicts a double bottom failure. Bearish intentions were evident when the stock briefly dipped below the neckline after the first attempt to surpass it. After hovering slightly above the neck-line for thee sessions, the stock finally plunged lower marking a double bottom failure.
The double bottom formation is not always simple and there could be whipsaws and other variations in the pattern.
A whipsaw double bottom is depicted in the chart of IDFC reproduced below. Note how there are two small intervening peaks instead of one in this pattern. The variation howeverdid not mar the pattern’s effectiveness, as the subsequent rally showed.