V. 19:2 (32-40): Double-Bottom Confirmation Strategy by Arthur Hill

How To Get Into The Trade Double-Bottom Confirmation Strategy

Here’s a strategy using a tried-and-true pattern to achieve faster entry signals and improve the reward-to-risk ratio. by Arthur Hill

The double bottom that emerged in the Dow Jones Industrial Average (DJIA) and many other securities in October 1998 is a memorable formation, a powerful reversal. With the power behind it in mind, I developed an entry strategy based on the double bottom, or the second test of a key support level. I call it the double-bottom confirmation strategy.

DOUBLE BOTTOMS

Double bottoms are considered to be reversal patterns that form after a significant decline. They are marked by two roughly equal lows and confirmed when the peak between the two lows has been surpassed. The first low marks initial support with little clue that the downtrend may be near an end. The subsequent reaction rally’s peak marks resistance, or the price at which overhead supply dominates. When the second low begins to form near the previous support level, it indicates that demand has begun to overpower supply. For the double bottom to be deemed complete, demand must be sufficient to propel prices off the second low and past the previous reaction high, thus conquering overhead supply. (See Figure 1.)