Written and copyright © 2011-2013 by Thomas N. Bulkowski. All rights reserved.
Busted Double Bottom 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.
Shorting the stock in a bull market is probably unwise since the median decline is just 12% and that represents the results of hundreds of perfect trades. In a bear market, the
median decline is 15% with an average drop of 22%, so a trader has more breathing room. None of the results include commission or other charges, too.
Single Busted Double Bottoms
The figure shows an example of a single busted double bottom. I highlight the top of the pattern 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. After that, the two bottoms 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:
- Price must confirm the double bottom by closing above the top of the double bottom. That occurs at C in the figure.
- Price must rise less than 10% (the rise from the to blue line to D).
- Price then closes below the bottom of the double bottom (E).
- 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 forming a double bust.
Double Busted Double Bottoms
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 bottom of the double bottom. 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.
- Price must confirm the double bottom by closing above the top of the double bottom (C).
- Price rises less than 10% before reversing (the move from the top blue line to D, in this example).
- Price closes below the bottom of the chart pattern (E). This busts the pattern for the first time.
- Price drops less than 10% below the bottom of the double bottom (the drop from lower blue line to F).
- Price closes above the top of the double bottom. This busts the chart pattern for the second time (G).
- 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.
Double Bottom, Triple Busts
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:
- 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.
- Price closes below the bottom of the chart pattern, busting the pattern for the third time.
- 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.
Methodology for Testing Busted Double Bottoms
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.
Busted Double Bottom 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?
- Single busts: 11% of the time.
- Double busts: 4% of the time.
- Triple or more busts: 1% of the time.
- All busted double bottoms: 16% of the time (16% in bull markets, 19% in bear markets).
Of busted double bottoms, what is the frequency distribution?
- Single busts: 66% of busted double bottoms bust only once.
- Double busts: 27% of them bust twice.
- Triple or more busts: 8% of them bust at least three times.
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
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%.
- The average drop: 21%
- Median (mid range) drop: 20%
- The average drop (for comparison) of double tops (busted and non-busted) is: 16% from 1,658 patterns in bull markets, using data updated October 2011.
What is the drop from perfect trades after all busted double bottoms?
- The average drop in a bull market: 15%
- Median (mid range) drop in a bull market: 12%
- The average drop in a bear market: 22%
- Median drop in a bear market: 15%
What is the failure rate of all busted double bottoms in bull markets? The answer appears in the below table.
Failure Rate for Busted Double Bottoms
|Failure rate:|| 5% || 10% || 15% || 20% || 25% || 30% || 35% || 50% || 75% || >75% |
|Number of double bottoms:||67||82||60||38||37||18||25||26||5||0|
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.
Trading Busted Double Bottoms
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.
Additional Trading Tip for Busted Double Bottoms
I don't have additional trading tips based on the statistical performance of busted double bottoms. Here's what I looked at.
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.
Entry Setup for Busted Double Bottoms
As an entry setup, here are the rules for trading busted double bottoms.
- Price must confirm a double bottom by closing above the highest peak in the pattern.
- Price rises less than 10% before reversing and closing below the bottom of the double bottom. This busts the pattern.
- 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).
- 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).
- 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.
- Cover the short when the trend changes.
-- Thomas Bulkowski
Written and copyright © 2011-2013 by Thomas N. Bulkowski. All rights reserved. I couldn't sleep for days after Michael Jackson died!