Between June 8th and June 13th, 2007, Russell 2000 made what looked like a double-bottom when prices retraced from the all time record high near 863. The retrace seemed deeper than most traders would have expected as it moved down without pause before stopping at 830. Then it bounced up two days then moved back toward 830, dipped a bit lower before turning back.

Figure 1

According to Vic Sperandeo in this book “Trader Vic—Methods of a Wall Street Master” who coined this formation 2b, where the two troughs are not equal, the 2nd trough is lower than the 1st one. This formation is an expanded version of the double-bottom. This type of formation is most often seen in intraday charts. Below is an example extracted from his book of a 2b top.

Figure 2 A double-top forming with the second top being higher than the first, a 2b formation.

Double-bottom is one of the classics of technical analysis. These patterns are spotted at market bottoms. Similar to the triple-bottom formations, the double-bottoms are more common. Imagine this scenario: the market moves down then rallies; it makes a retest of the recent low. Just as it slows as it nears the recent low, it then turns out to be a false double-bottom as it continues lower. This happens very often and many traders try picking bottoms by trying to take a long entry right away as the second bottom is formed. Without confirmation and enough given time for the bottom to finish forming, the traders’ early entries will only cause string of losses (or one big loss). By the time the bottom has indeed forms, he may have blown out his trading account. The other clue to find a double-bottom is by watching the volume at the lows for divergence. If the second low has smaller volume than the first, then it indicates a loss of interests from bears. Volume helps but still an early doesn’t help make a bad trade into a good trade.

Prices made their way up to the peak between the two troughs. The break of the peak is the confirmation of the double-bottom. As for the volume, the first low had two high volume bars on the Russell 2000 index e-mini (chart below with pink rectangles). The second low that went lower than the first low was pushed with lighter volume (2nd vertical pink rectangle to the right). This indicates that the second low had less bears participating. Not only that, the up bar following the low shows a low volume but prices was higher. This shows how a little buying it took for prices to move up, meaning the bears are no longer shorting and/or are covering their shorts.

Figure 3
The chart below showed prices moved higher toward the close. With the overnight action (the bars without much volume underneath), the prices stabilized. Then at the open, the prices gap and broke the high of the peak, confirming that the double-bottom is now in play. Immediately, the long is taken and the measured target is made. Also, the stop is placed below the low of the overnight action. The other option is the place the stop loss just below the low of the breakout bar, which is the opening of the day (usually there is strong support at the opening price).

Figure 4

To measure the profit target, there are two options: the first is the measure from the higher of the two lows to the peak; the second is the measure from the lower of the two lows to the peak. To be conservative, always take the measurement with the smaller target. Make a conservative estimates are usually the safe way to profits. Missing the target by a few ticks can be a very annoying matter.

The following day after the opening, an exit was taken as it reached the measured target 859.80. Just as it hit the target, it moved downwards. Targets can show stunning accuracy where prices will to move then reverse.

Figure 5

Conclusion

When a possible double-bottom with a little crooked to one-side, it may a valid double-bottom. This happens often in real trading where market makers and floor traders try to run the stops then push it back. This little action tends to flush out weak hands so the pros can remove cash from the table. Double-bottoms can provide profitable opportunities if the entry is well timed. The early birds who try to predict the bottom before having it confirmed will end up being the worm for the bigger birds.