What is a P&F Quadruple Bottom breakdown?
The Quadruple Bottom Point and Figure pattern is a rare sell signal. The pattern encompasses a falling column of O's exceeding three prior columns of O's. The preceding O columns are across the same level, thereby creating a support shelf. Success on the fourth attempt to break support, activates the breakdown.
The Quadruple Bottom breakdown follows a prolonged period of consolidation. They appear in bear market downtrends, during periods of indecision, effectively a battleground for the bulls and bears. The build up can persist for months as trading seesaws along.
Psychology of the Quadruple Bottom
A wolf in sheep's clothing best describes the Quadruple Bottom pattern. The sideways price action following a downtrending market gives the impression a bottom is building. Volatility subsides. Short traders cover on their new found hope and the stock is bought in anticipation of a recovery. However, once the pattern is complete, with its fourth column of Os, the floor gives way. Support is no more, the bottom was nothing but an illusion, and the general downtrend marches south to new lows.
How to Trade a Quadruple Bottom?
Upon activation of a Point and Figure Quadruple Bottom sell signal, the chart needs further investigation to cement conviction.
- The primary price trend for the stock or index must be down. An indication of this may be gleaned from a bearish trendline above the Quadruple Top development.
- Avoid selling into the pattern during a bull market. Since, nine times out of ten, a Bear Trap will be the final outcome. The market loves to bluff the majority.
- Plenty of bearish patterns preceding development will boost confidence in the PnF Quadruple Bottom. That could include High Poles, Bull Traps, Double Bottoms, to name but a few.
- Needless to say, a bearish relative P&F chart is desirable! A weak relative chart reveals the stock to be sick, and consequently, more vulnerable to developing an aggressive Quadruple Bottom breakdown.
- A pattern should never be followed without knowledge of the sentiment situation. With respect to the Quadruple Bottom Point and Figure pattern, evidence of hope during its development will strengthen the breakdown. Good news stories spawn hope. Should the Quadruple Bottom breakdown develop during a period of despair, it may be a trap, and should not be trusted.
When to go short?
Short positions are best entered a week or two following the Quadruple Bottom breakdown. Broad patterns, followed by a break of support, are observed by the masses. That invariably results in a snap-back rally to squeeze shorts. Transitory strength could be exploited, selling at a more desirable level, providing no buy signal prints during the course of the dead-cat.
The Quadruple Bottom has a good track-record in the midst of a bear market, when the price is locked in a downtrend, beneath falling trendline resistance.
On the other hand, during a bull market, the Quadruple Bottom is prone to failure, morphing into a Bear Trap.
Where to place a stop-loss when short?
When the breakdown is followed, via a short position, a stop-loss is positioned one box above the prior column of Xs.
The stop-loss is trailed lower with the downtrend. Positioned to one box above subsequent X columns, the counter-trend moves.
How to calculate a downside price objective?
The Quadruple Bottom is one of the broadest P&F sell signals. Therefore, the tool to use for downside targets is the horizontal count method. That will capture the impact of the pattern's build up.
Quadruple Bottom Explained by Example
Pattern appearance ahead of sharp price breakdown
Baker Hughes printed a Quadruple Bottom sell signal in October 2018. The price deteriorated, then consolidated, trends do not move in straight lines! As of August 2019, trading is trapped beneath its falling 30-week moving average, resistance. One box away from a fresh all-time low.
Quadruple Bottom signalling downtrend resumption
Cloud Peak Energy confirmed a PnF Quadruple Bottom breakdown in July 2018. A price crash followed the sell signal. The stock was delisted from the NYSE stock exchange in March 2019, the final trading price was 15 cents!