What Is a Double Bottom Pattern in Technical Analysis?

Visual Characteristics of the Pattern

The double bottom pattern presents a distinctive “W” shape on a price chart, signaling a potential shift in market direction. This formation typically emerges after a security has experienced a sustained decline. The pattern is characterized by two distinct low points that occur at approximately the same price level, separated by an intermediate peak [1, 5]. This suggests a strong support level has been established, tested twice without falling further [1, 9].

Observing this “W” formation on daily or weekly charts provides a more reliable signal for longer-term trend changes [1]. The two lows do not need to be precisely identical but should be within a close range, within 3% to 4% of each other [1]. The overall appearance conveys a market that has attempted to push prices lower on two occasions, only to find buying interest at similar levels, preventing further descent [1].

Defining Pattern Elements

The double bottom pattern comprises several identifiable components. The “first bottom” marks the initial low point reached by the price after a preceding downtrend [2, 12]. After this first bottom, the price rebounds, forming a temporary high point known as the “reaction high” or “peak” [2, 12]. This peak represents a brief period where buyers regained some control before sellers reasserted pressure.

Subsequently, the price declines again, forming the “second bottom” at a price level roughly equivalent to the first bottom [1, 2]. This second low indicates another test of the established support level [5]. The “neckline” is a resistance level drawn horizontally across the reaction high, connecting the peak between the two bottoms [3, 8]. Breaking above this neckline is a key event that confirms the pattern’s completion and signals a potential upward movement [5, 6].

Significance of the Pattern

The double bottom pattern signifies a bullish reversal, indicating a potential shift from a bearish downtrend to a new uptrend [2, 5]. This pattern suggests that selling pressure has diminished, as the market fails to make new lower lows after two attempts at a similar price level [1, 7]. The underlying market psychology reflects a change in sentiment; initially, sellers dominate, driving prices down [2, 7]. However, after the first bottom, buyers perceive the asset as undervalued, leading to a temporary rebound [2, 7].

The subsequent decline to the second bottom represents sellers’ final attempt to push prices lower, which fails as buyers step in at or near the previous support [1, 12]. This repeated defense of a price level demonstrates that demand is overcoming supply at that point [13]. The pattern’s completion, particularly when the price moves above the neckline, signals that buyers have taken control, marking a potential turning point for the asset’s price trajectory [1, 12].

Volume as a Confirmation Tool

Trading volume plays an important role in confirming the validity of a double bottom pattern. Volume is often high during the initial downtrend leading to the first bottom, as sellers are actively pushing prices lower [10]. As the price forms the first bottom and then rebounds to the reaction high, volume might decrease during this upward movement [10]. This indicates that the initial bounce might be more of a short-covering rally rather than strong buying interest.

When the price declines to form the second bottom, volume decreases or remains low, suggesting that selling pressure is fading [10]. This reduced volume at the second low is an indicator that fewer sellers are willing to push the price further down [5]. An increase in volume is expected when the price breaks above the neckline, confirming strong buying interest and validating the bullish reversal [1, 10]. This surge in volume during the breakout phase adds conviction to the pattern and indicates that a new uptrend is likely beginning [1, 5].

Measuring Potential Price Movement

Technical analysts use a method to project a potential price target once a double bottom pattern is confirmed. This projection involves measuring the vertical distance from the lowest point of either bottom to the neckline [11, 12]. This measured distance represents the “height” of the pattern [2, 13].

Once this height is determined, it is added to the price level of the neckline, or the breakout point [11, 13]. For example, if the lowest point of the pattern is $40 and the neckline is at $50, the height of the pattern is $10. Adding this $10 to the breakout point of $50 suggests a potential price target of $60 [2, 11]. This calculated target provides an estimate for the potential upward movement following the confirmed breakout, guiding traders in setting profit objectives [11, 12].