Double Bottom Reversals
A double bottom reversal is a bullish reversal pattern. The pattern consists of two consecutive troughs that are roughly equal, separated by a moderate peak. An intermediate- or longer-term reversal is only confirmed once the key breakout point resistance is broken. In the chart of Morgan Stanley below, we show both a double bottom (w-bottom) and double top (m-top) reversal. Once the line of resistance is broken decisively, the shares continue almost uninterrupted toward the target price.
With any reversal pattern, there must be an existing trend to reverse. In the case of a double bottom reversal, a significant downtrend should be in place. The first trough should mark the lowest point of the current trend, which is followed by an advance. The high of the peak is often rounded, which signifies that demand is increasing, but there is too much hesitation for a strong break out to ensue. The subsequent decline tends to occur on lower volume and meets support from the previous low. Support is considered a band, not necessarily an exact price.
Volume is an important aspect of an advance following the second trough. There should be evidence that buying pressure is accelerating (and potential change in sentiment). A decisive break of the key resistance is necessary to confirm a double bottom reversal, which should also see a rise in volume. If a breakout occurs, the previous line of resistance becomes support.
The price target is measured as the distance from the trough lows to the intermediate peak. This distance should be added to the breakout point. Before a position is taken, however, an investor should wait for support to be broken in a convincing manner, and usually with an expansion of volume.
Double Top Reversals
A double top reversal is simply a bearish alternative to the double bottom reversal. It consists of a prior uptrend, halting at a peak price. A trough is later formed, followed by a re-test of the peak. For the pattern to be fully formed, the previous trough needs to be taken out decisively on heavy selling pressure.