What is a P&F Triple Bottom?
The Triple Bottom Point and Figure breakdown is a sell signal. Activation of the pattern occurs when a falling column of Os exceeds by one box, two preceding columns of Os. Prior columns must be across the same lateral level. The breakdown defeats chart support on the third attempt.
Skilled traders follow Triple Bottom breakdowns when the primary trend of a stock is south, in a bear market, or correcting. The breakdown follows a period of trend consolidation, typically several weeks in duration.
Less common than the Double Bottom signal but more powerful by virtue of their greater width.
Psychology of a Triple Bottom Breakdown
Calm before the storm best describes the emotional build up to the Triple Bottom Point and Figure breakdown. The market trades sideways for an extended period of time. Traders let down their guards. Novices feel a bottom has finally been found following a painful downtrend. Hope encourages the opening of fresh long positions and the covering of shorts. However, optimism rapidly turns to anguish, as the price breaks down through support. That break, activation of the Triple Bottom pattern, triggers a wave of selling as positions established during the sideways market, rush to the exit. The downtrend duly resumes in earnest.
Spread Triple Bottom Variant
A Spread Triple Bottom is a sideways extension of the standard pattern. At least two more columns are appended to the pattern's width. The low of the additional O column or columns, are shy by at least one box, of the two core O columns.
A stronger, and deeper, downside move follows in comparison to the narrower standard Triple Bottom. Explained by the extra width of the Spread Triple Bottom variant. Greater pattern width often equates a greater volume of traders being wrong-footed by the eventual breakdown.
P&F Triple Bottom Trading Explained
Post activation of a Triple Bottom, or its sibling, the Spread Triple Bottom, further chart analysis is essential.
- To instill confidence in the breakdown, the primary price trend for the stock or index, must be down. Look for trading beneath a bearish trendline.
- Avoid chasing a Triple Bottom pattern during a bull market. A Bear Trap is likely to be the outcome if there is no downside follow-through.
- Enhancing downside conviction are a plethora of bearish signals preceding the Triple Bottom Point & Figure pattern.
- If considering shorts, the pattern's success will be greater if the relative P&F chart is bearish.
- The sentiment condition during development, as with every pattern, needs to be known. If the pattern built during optimistic news-flow, yet there was no upside breakout, it is a sure sign the price needs to extend lower.
When to trade short?
Patience is necessary upon activation. Short positions are best entered a few days to weeks after the Triple Bottom, or Spread Triple Bottom, confirms. Following pattern activation, the price typically bounces back, presenting a more attractive level to short or sell at. Waiting also enables the trader to determine if the pattern can morph into a Bear Trap. That latter scenario would be likely should the price rise on bad-news.
During an ingrained bear market, with the price in an established downtrend, dithering beneath trendline resistance, the Triple Bottom has decent reliability.
A bull market on the other hand, the Triple Bottom is highly susceptible to failure, resulting in a Bear Trap.
Where to place a stop-loss when shorting a Triple Bottom?
Assuming the criteria for pattern activation is satisfied, place a stop-loss one box above the prior column of Xs.
As the downtrend works south, the stop-loss could be repositioned to the box above the next completed column of Xs. The counter-trend move, termed a dead-cat, is deemed complete when a subsequent breakdown signal triggers.
Calculating a price target?
A horizontal count could be used to calculate a downside objective of a Triple Bottom Point and Figure sell signal. The method utilizes the formations appealing width. Basically, the greater the width, the greater the downside target.
Triple Bottom Breakdown Explained by Example
Spread Triple Bottom support floor breach
In December 2018, Exxon Mobil provided a Spread Triple Bottom example. Support across $75 broke, the price collapsed down to $65 over just a few days.
Signal of downtrend reassertion
Early August 2018 saw U.S. Silica fill the $23 box, breaching the two preceding columns across $24. The price has not looked back since Triple Top confirmation. As of October 2019, the price trades at $8. A 60% loss in just over a year!
Triple Bottom in the midst of a correction
August 2018 saw activation of a Triple Bottom sell signal on the KBH Home Point & Figure chart. The box fill at $24, broke support across $25, from the two preceding O columns. The price fell to a box low of $17 in November of that year and has since recovered.