As of 11/11/2019
  Indus: 27,691 +10.25 +0.0%  
  Trans: 11,030 -37.61 -0.3%  
  Utils: 830 -5.55 -0.7%  
  Nasdaq: 8,464 -11.03 -0.1%  
  S&P 500: 3,087 -6.07 -0.2%  
YTD
 +18.7%  
 +20.3%  
 +16.4%  
 +27.6%  
 +23.1%  
  Targets    Overview: 10/31/2019  
  Up arrow27,750 or 26,900 by 11/15/2019
  Up arrow11,300 or 10,100 by 11/15/2019
  Up arrow870 or 800 by 12/01/2019
  Up arrow8,500 or 8,000 by 11/15/2019
  Up arrow3,150 or 2,950 by 11/15/2019
As of 11/11/2019
  Indus: 27,691 +10.25 +0.0%  
  Trans: 11,030 -37.61 -0.3%  
  Utils: 830 -5.55 -0.7%  
  Nasdaq: 8,464 -11.03 -0.1%  
  S&P 500: 3,087 -6.07 -0.2%  
YTD
 +18.7%  
 +20.3%  
 +16.4%  
 +27.6%  
 +23.1%  
  Targets    Overview: 10/31/2019  
  Up arrow27,750 or 26,900 by 11/15/2019
  Up arrow11,300 or 10,100 by 11/15/2019
  Up arrow870 or 800 by 12/01/2019
  Up arrow8,500 or 8,000 by 11/15/2019
  Up arrow3,150 or 2,950 by 11/15/2019

Bulkowski's Busted Double Bottoms

 

Reviewed on 6/21/2019.

Information on busted chart patterns is discussed in my book, Visual Guide to Chart PatternsVisual Guide to Chart Patterns book.. You can find information in the book in Chapter 22: "Busted Pattern Buy Setups" (starting on page 229) and in Chapter 25, "Busted Pattern Sell Signals" starting on page 271.

I show a picture of the book on the right.

If you click on the above link and then buy the book (or anything) while at Amazon.com, the referral will help support this site. Thanks.

-- Tom Bulkowski

$ $ $

Busted Double Bottoms: Summary

A stock forms a double bottom which confirms as a valid pattern when price closes above the top of the double bottom. Price rises less than 10% before dropping and closing below the bottom of the chart pattern. This busts the upward breakout and the double bottom becomes a busted double bottom.

Shorting a stock showing a busted double bottom in a bull market is probably unwise since the median decline is just 12%, and that represents the results from hundreds of perfect trades. In a bear market, the median decline is 15% from a busted double bottom with an average drop of 22%, so a trader has more breathing room. None of the results include commission or other charges.

Busted Double Bottoms: Single Busts

Picture of Abbott Labs (ABT) on the daily scale.

The figure shows an example of a single busted double bottom (AB, busting at E). I highlight the top of the double bottom pattern (AB) with a blue line and the bottom of the pattern with another blue line. Yes, I like blue.

An Adam & Adam double bottom appears at AB. The price trend is downward leading to the start of the double bottom, as is nearly always the case (it's hard to see the downtrend in this example). After that, the two bottoms (AB) appear near the same price.

The stock breaks out upward from the double bottom when price closes above the highest peak between the two bottoms. That happens at C.

Price climbs to D but that is less than 10% above the breakout price (C), before the stock tumbles. The drop takes price down to E where it closes below the bottom of the double bottom. That busts the double bottom.

Price continues lower, at least 10% (F), to confirm a single busted pattern.

To identify a single busted double bottom, look for:

  1. Price must confirm the double bottom by closing above the top of the double bottom. That occurs at C in the figure.
  2. Price must rise less than 10% (the rise from the to blue line to D).
  3. Price then closes below the bottom of the double bottom (E).
  4. Price continues dropping at least 10% (the drop from the bottom blue line to F).

If price fails to drop more than 10% below the bottom of the double bottom, then it could be double busting.

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Busted Double Bottoms: Double Busts

Picture of Abbott Labs (ABT) on the daily scale.

I show another chart of Abbott Labs but the double bottom at AB is not ideal. Price on the B bottom is above the left one. If you're drunk, then you might blame this on your eyesight. If not, then I thought that the two bottoms were close enough in price to be acceptable, but it sure looks strange on this chart.

Price confirms the Adam & Adam double bottom at C when it closes above the top of the chart pattern. Price climbs only to D before dropping. The measure from the top blue line to D is less than 10%.

Price busts the double bottom at E when it closes below the low of the double bottom (below A). However, the stock only drops to F, which is less than 10% below the bottom blue line, before heading up to G.

At G, price closes above the top of the double bottom, busting it for the second time. To finish the double bust, price continues to rise to H and beyond, more than 10% above the top blue line.

For a double bust, look for these elements.

  1. Price must confirm the double bottom by closing above the top of the double bottom (C).
  2. Price rises less than 10% before reversing (the move from the top blue line to D, in this example).
  3. Price closes below the bottom of the chart pattern (E). This busts the pattern for the first time.
  4. Price drops less than 10% below the bottom of the double bottom (the drop from lower blue line to F).
  5. Price closes above the top of the double bottom. This busts the chart pattern for the second time (G).
  6. The stock rises at least 10% above the top of the double bottom (the move from the top blue line to H).

A double busted double bottom turns into a triple bust when the GH move is less than 10% and price then closes below the bottom of the chart pattern.

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Busted Double Bottoms: Triple Busts

Picture of Dell (DELL) on the daily scale.

I show a picture of Dell (DELL) on the daily scale. Price forms the double bottom at AB, which confirms when price closes above the top of the pattern at C.

Price climbs less than 10% before dropping to D, which closes below the bottom of the chart pattern, busting it for the first time.

Price drops less than 10% before climbing to E and closing above the top of the double bottom. This busts the double bottom for a second time.

The move from the top blue line (the top of the chart pattern) to E is less than 10%. Then price drops to F. A close below the bottom of the chart pattern busts it for the third time. At this point, I stop counting the busts.

For a triple (or more) busted double bottom, look for the following:

  1. Find a double busted double bottom except that price fails to rise more than 10% after the second bust (the rise from the top blue line to E). In this example, D is the first bust, and E is the second.
  2. Price closes below the bottom of the chart pattern, busting the pattern for the third time.
  3. Price may continue to bust the pattern if it crosses the pattern and then fails to move more than 10% above the top or below the bottom of the chart pattern. The busted count stops whenever the move is more than 10% above or below the double bottom.

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Busted Double Bottoms: Methodology for Testing

I found 2,738 double bottoms in 1,033 stocks dating back as far as July 1991 to October 2011. Few stocks covered the entire period. All of the double bottoms I found manually either using a historical search or real time (looking at my stocks each day). The real time additions prevented any look-ahead bias since I am not privy to future price movements.

I then used software to measure performance and flag potential busted chart patterns.

Gauging performance uses the same method as I used to catalog non-busted chart patterns. That is, the search for the new ultimate high or low proceeded as described in the glossary. Thus, the numbers reported in Busted Double Bottoms Results (next section) should be considered perfect trades. Do not expect to duplicate the results in actual trading. The numbers should be used only for comparison purposes to other chart patterns.

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Busted Double Bottoms: Results

The following numbers are the results from perfect trades in bull markets, unless otherwise noted. Do not expect actual trading results to match those discussed below. Use the numbers only for comparison purposes with other chart patterns.

How often do double bottoms bust?

Of busted double bottoms, what is the frequency distribution?

If you trade a busted double bottom, there is a 66% probability that it will bust just once. Thus, 34% fail to show price dropping by more than 10% below the bottom of the double bottom.

What is the average drop for single busted double bottoms? Answer: As measured from the bottom (the lowest valley) of the chart pattern to the ultimate low the drop averaged 21%.

What is the drop from perfect trades after all busted double bottoms?

What is the failure rate of all busted double bottoms in bull markets? The answer appears in the below table.

Busted Double Bottoms: Failure Rate
Failure rate:  5%  10%  15%  20%  25%  30%  35%  50%  75%  >75% 
Number of double bottoms:678260383718252650
Percentage:19%23%17%11%10%5%7%7%1%0%
Cumulative:19%42%58%69%79%84%91%99%100%100%

For example, there were 67 double bottoms that failed to show price dropping at least 5% below the bottom of the double bottom. Those 67 represent 19% of all busted double bottoms. On a cumulative basis (a running total), the 67 also represent 19% of all busted double bottoms.

The median drop of all busted double bottoms is 12%. You can see that by interpolating between the 10% and 15% columns. Thus, half of all busted double bottoms will see price drop 12% in a bull market, providing they are traded perfectly.

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Busted Double Bottoms: Trading

Picture of Advanced Micro Devices (AMD) on the daily scale.

I show a picture of Advanced Micro Devices (AMD) on the daily scale. The double bottom is at AB which confirms when price closes above the top blue line, at C.

Notice that price climbs less than 10% above the blue line before dropping and closing below the bottom of the chart pattern at D.

When the stock closes below the bottom blue line, D, it busts the chart pattern. A conditional order to short the stock after the close would get you into the stock at the open the next day, at 16.41.

The stock drops and bottoms in December 1997 (below E) at 8.56 before bouncing up to 15.50. The decline measures 48%.

This example shows an unusually large decline. Do not expect similar results from your trades. Remember that the median decline after a busted double bottom is just 12%. Half of all trades will show smaller declines.

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Busted Double Bottoms: Additional Trading Tips

I tried these variations...

I compared performance using 50- and 200-day simple moving averages when price crossed above or below the SMAs.

I looked at performance over time (weeks and months) and the results were a yawn.

I compared the length of the trend start to the first double bottom with busted performance. Another yawn (two percentage point difference in performance: If the trend start is longer than 72 days from the double bottom start, that's good).

I also looked at the position of the trend start with the start of the chart pattern. Since the trend start is nearly always above the first bottom, the results suffered from low (just 2) sample counts.

Finally, I look at the median drop from the trend start to the bottom of the first bottom. This resulted in another two percentage point difference (if the trend start is more than 16% above the top of the double bottom, that's good). I gave up after that.

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Busted Double Bottoms: Entry Setup

Picture of my dog

As an entry setup, here are the rules for trading busted double bottoms.

  1. Price must confirm a double bottom by closing above the highest peak in the pattern.
  2. Price rises less than 10% before reversing and closing below the bottom of the double bottom. This busts the pattern.
  3. If it is a bear market and stocks in the industry are also moving lower, then consider shorting the stock at the next day's open. The median decline of all busted double bottoms is 15% (average is 22%). Both numbers are for perfect trades. In a bull market, the decline is probably not worth trading unless special circumstances apply (meaning you're almost sure the stock is going to decline because of weak fundamentals, poor management and so on).
  4. Place a conditional order to cover the short if price closes a penny above the top of the double bottom. If the stop location is too far away, adjust the stop accordingly, but recognize that you stand a greater chance of failure (price often retraces back into the pattern before resuming the down trend).
  5. Depending on the severity of the bear market, industry and company weakness, the decline can be steep or shallow. If the drop hits 15% below the bottom of the double bottom (the median decline in a bear market or use 12% in a bull market), then a continued decline will be increasingly rare. Tighten and trail your stop as price descends.
  6. Cover the short when the trend changes.

-- Thomas Bulkowski

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See Also

 

Support this site! Clicking any of the books (below) takes you to Amazon.com. If you buy ANYTHING while there, they pay for the referral.

My novels:      New                  Bumper's Story Head's Law

Chart Patterns: After the Buy Getting Started in Chart Patterns, Second Edition Trading Basics Fundamental Analysis and Position Trading Swing and Day Trading Visual Guide to Chart Patterns Encyclopedia of Candlestick Charts Encyclopedia of Chart Patterns 2nd Edition Trading Classic Chart Patterns

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