Thursday, March 22, 2007

Double Bottom

What is a double bottom? It is the best indicator of an up market anyone can ever find - I'm seeing it in so many stocks lately I can't hardly pick between them.

There are two consistent patterns in stock movement - the "M" and the "W". They look like this -

When you see this and it occurs in every time frame be ready to go long or short the second leg. It is especially potent on the daily or longer time frame charts. And it is a very recognizable pattern. John Bollinger in his book about his famous bands discusses the M's and W's at some length. Japanese candlestick methods also talks about the two mountains (M) and the two rivers (W).

Don't confuse this with triple tops and triple bottoms - these are different beasts all together. The triple top is the head and shoulders formation and the triple bottom is the inverted head and shoulders. The Japanese call them the three Buddhas and three rivers. Any M-W or W-M formation can segue into a triple top or triple bottom - but we are playing the leg not the whole. And that is a problem in description - I'll show what I mean - same stock - different way of drawing the lines

And this is an absolutely perfect head and shoulders formation and if it meant anything this stock should be heading to 12 right now instead of 19. So I should have sold out of GGB when the second shoulder formed - except I don't believe in this formation - in fact it is a very low probability formation. W's and M's on the other hand are high probability.

There's also a lot of mythology built up around the shape of the M or the W - I say that's just to confuse people - stay simple folks, stay simple.

You know I used to believe in all of this Bull Snot - I really did - but I just don't anymore - I've studied the market for so long and so hard that these formations are meaningless - give me a tweezer bottom, a pivot point, a BOB and I'm in the game - start talking to me about head and shoulders and I start checking for dandruff - I also grab my wallet because you aren't getting any of my hard earned money.


Dogwood said...

One thing that has always bothered me about the head and shoulders pattern is how long you had to wait for the pattern to confirm itself.

By the time you have confirmation, it usually appears that most of the move is already over.

Anonymous said...

Very interesting observation about the head and shoulder.......


What about triple bottoms.