A double bottom is a type of charting pattern that is used in analyzing activity within a given market or even a specified set of investments. Identifying a pattern of this type makes it possible to track both a downward trend with a given stock or index and the rebound activity. As the name implies, the double bottom typically considers not only a single incidence of this up and down movement, but two incidences that have occurred within a relatively short period of time. The nature of double bottom activity has earned the phenomenon a nickname of the W factor, with the letter serving as an indication of the down-up-down-up movement of the stock or index.
The identification of a double bottom does not have to be identical waves of downward and upward movement, although those waves should be somewhat similar to one another. For example, the second bottom figure in the sequence may not be quite as low as the first, but will like be within 5% of that previous low. In like manner, the rebounds do not have to be identical, but will be within a limited range of one another.
The value of identifying a double bottom is that tracking the phenomenon will often provide some valuable clues regarding how that particular stock or index reacts to certain events within a given market or within the general economy. Over time, investors can utilize the data to identify just the right time to buy and sell shares of the stock in question, allowing them to earn the greatest amount of returns from the transactions. For individuals who prefer to hold onto the shares over the long-term, identifying the pattern makes it easier to evaluate the returns earned over the course of a particular twelve month period, and decide if the cumulative return is sufficient to merit continuing to hold the asset, or if the time has come to sell in favor of an asset that demonstrates the same level of volatility but has a track record of producing greater returns.
A double bottom is a relatively common pattern that just about every stock option will experience at one time or another. For this reason, identifying this type of trend is not necessarily a sign that the stock is becoming unstable or that something is wrong with the market. At the same time, seeing a recurring pattern of a double bottom over several months may be reason to look into the situation and identify the reasons behind the recurring reversals, and determine what impact the trend may have on the market over the next several months or years.