The Bounce Trade by Thomas Bulkowski
A double bounce following a long decline spells a trading opportunity. Find out why.
I ’m not sure exactly how I happened upon this chart
pattern. I noticed that after a long, perhaps straight-line
decline, stocks often bounce — not once but twice. Figure 1 displays an example of this. In the fall of 1997, National Semiconductor (NSM) peaked at $42.875, along with other stocks in the semiconductor industry. A year later, it reached a low of just $7.4375, an astounding decline of 83%. As can be expected, but rarely anticipated correctly, the stock bounced. Two months later, it climbed to a high of $17.625, more
than double the nadir.
A retest of the low usually occurs, and that’s what happened next. The stock declined to a low of $8.625 in early April 1999, retracing most of its gains. Although the twin lows appear to be a double bottom, strictly speaking, they’re not. For a double bottom, the
two lows should be within 4% of each other. Here, the price difference is almost 20%, though the discrepancy is more visible on the daily scale.