What is a Point & Figure Double Bottom?
The P&F Double Bottom breakdown is a sell signal. During a bear market or correction, they are a frequent sell signal. One of the more basic patterns on a Point & Figure chart. Effective and powerful.
The Double Bottom pattern simply involves a falling column of Os exceeding the prior column of Os by one box. The breakdown signals a reassertion of the downtrend via the break of support.
Psychology of a Point and Figure Double Bottom
During a downtrending market the Double Bottom, although uncomplicated in appearance, inflicts pain on long holders. The break of support is a clear indication that the price is reasserting a downtrend or correction. The new short-term low resulting from the pattern means an investor's holding is worth less monetary value than it was preceding the breakdown. That feeling of loss invariably leads to selling. The market swamped by supply, extends to the downside.
Trading a Double Bottom breakdown
With activation of a Double Bottom P&F pattern, further analysis of the chart is necessary. Additional bearish evidence will add downside conviction.
- Confirm the primary price trend for the stock or index is down. Trading beneath a bearish trendline.
- During a strong bull market, avoid trading the Double Bottom pattern. The move will likely morph into a cruel Bear Trap.
- Look for other bearish patterns preceding the Double Bottom breakdown, such as a High Pole or Bull Trap. A series of prior Point & Figure Double Bottoms in the falling trend will also add downside conviction.
- A bearish relative P&F chart will increase a Double Bottom's success likelihood. If the relative chart is trending down, the stock is underperforming. Therefore, more susceptible to decisive sell signals on the price chart.
- As always, sentiment should be considered in conjunction to the Double Bottom sell signal. If the breakdown occurred during a period of good news-flow, it is a sure sign the stock is in trouble. Buyers on the good news will need to exit, exacerbating the sell-off.
Short entry is best sought a few sessions following the Double Bottom. Breaks of support can be volatile, catching traders out in either direction. Therefore, watch to sell into a bounce to achieve the optimum risk-to-reward ratio.
During a bear market, with the price in an established down trend, beneath falling trendline resistance, the Double Bottom breakdown is a fairly reliable sell signal.
During a range-bound market, the signal is useful for forecasting range swings from the ceiling. However, be wary of a Point and Figure Double Bottom across a range floor, that is a prime spot for a Bear Trap to manifest.
In a bull market, the Double Bottom is prone to failure, also developing into a Bear Trap. Thus, best overlooked completely during a bull phase.
Placing a stop-loss for a short position?
Simply, one box above the prior column of Xs. As the downtrend unfolds, the stop could be trailed lower, to the box above the next completed column of Xs. Counter-trend pops are referred to as dead-cats.
Price objective from a Double Bottom sell signal?
A vertical count could be used to calculate a downside objective of the Double Bottom breakdown. Not the most appealing downside projection, depth wise, but they are fairly reliable. Additionally, watch for major downside support shelves as they have a tendency to draw the price lower.
Double Bottom Explained by Example
Consecutive Double Bottom sell signals
Over the second half of 2018, Tiffany produced a series of Double Bottoms. The five breakdowns simply signalled a reassertion of the downtrend. Over that time, the price was almost cut in half.
Over the same period as the above chart, the Tiffany P&F relative ratio, also produced a series of Double Bottoms.
Double Bottom pattern breaching trendline support
Double Bottoms that occur through a rising trendline have enhanced conviction. Additionally, note the Bull Trap preceding the breakdown on the Exxon PnF chart.
The Exxon trend between 2017 and 2019 has been down, falling with the price of crude oil. Until Crude can mount a sustained recovery, fresh Double Bottoms as the downtrend extrends are to be expected. The Double Bottom breakdown is the most frequent sell signal during a bear market.
Core Laboratories registered a pair of Double Bottoms in the summer of 2018. The latter breakdown resulted in a breached Bullish Trendline, worsening the stock's outlook. In October 2019, the price is trading around $40, a 60% price cut.
Core Labs P&F relative chart reinforced the weak outlook derived from the price chart. June and July both saw Double Bottoms. The latter signal broke the March Bullish Trendline, signaling a reassertion of the long-term downtrend.
Preceding bearish pattern activity
Diamond Offshore Drilling showed vulnerability in June 2018 with a Bull Trap. That pattern occurred across a key ceiling, round-number $20. A Double Bottom soon followed, with pattern activation coinciding with the break of a four month trendline. October 2019, the price is at $5, a 70% drop in just over a year!