Bulkowski’s Adam & Adam Double Bottoms

Written by and copyright © 2005-2010 by Thomas N. Bulkowski. All rights reserved.

On pages 213 to 228 of my book, Encyclopedia of Chart Patterns, Second Edition, I reported on Adam & Adam double bottoms (pictured to the right). Some of the information I share with you here.

Adam is a term that describes how the bottom looks, in this case, a narrow, pointed bottom, perhaps with a one-day downward spike. Eve bottoms are more rounded looking and wider. If they have spikes, they tend to be more numerous and shorter. Many times the difference between Adam and Eve is the width of each over their entire height. Adam bottoms tend to remain narrow but Eve bottoms widen over their height. When trying to decide which is which, ask yourself if the two bottoms appear different or similar. With Adam & Adam, the two should look similar (both narrow).

The chart pattern is a twin bottom formation that sports a low break even failure rate but a mediocre performance rank. The pattern becomes a true double bottom when confirmed (that is, when price closes above the center peak). Only then is it safe to buy, but that does not guarantee success. If you buy the stock before confirmation, the probability of having a successful trade drops to just 36%. A full 64% of the time, price fails to close above the peak after forming a twin bottom. Until confirmation, the squiggles on the chart are just that -- squiggles -- not a double bottom.

Of the four types of Adam and Eve combinations of double bottoms, Adam & Adam performs worst in several ways. The throwback rate is high, 64%, so it might be prudent to wait for the throwback to complete and price to resume rising before buying the stock. The average climb after the breakout is 12% below the performance of Eve & Eve double bottoms. Of the four types, Eve & Eve gives the best performance with lowest risk of failure.

Important Bull Market Results

Overall performance rank (1 is best): 10 out of 23 Break even failure rate: 5% Average rise: 35% Throwback rate: 64% Percentage meeting price target: 66%

Adam & Adam Double Bottom

Score your chart pattern for performance

Identification Guidelines

Trading Tips

A trading setup related to double bottoms and throwbacks is located here.

Trading Tactic	Explanation	Measure Rule
Measure rule	Reference the figure to the right. Compute the height from the highest peak (A) to the lowest valley (B) in the pattern then multiply it by the above “percentage meeting price target.” Add the result to the breakout price (point A, the highest peak in the pattern) to get the target (C).
Stop	Place a stop loss order slightly below the lower of the two bottoms (point B in the figure to the right). Check to make sure the stop is not too far below the entry price. If so, then either raise the stop (try a volatility stop) or abandon the trade for a more promising setup.
Price reversal	Price must have something to reverse, so if the decline leading to the double bottom is small, expect a small rise.
Big W	Look for a double bottom with a tall left side, one with a steep decline and few or no price consolidations along the way down. Expect price to return to near where the downtrend began.	Handle
Confirmation	Wait for confirmation – price to close above the peak between the valleys. If you don’t wait, there’s a 64% chance that price will continue lower without confirming the double bottom.
Handle	Sometimes price will confirm the double bottom then waffle up and down, forming a handle. When price breaks out of this region, it often moves up in a strong trend. The figure to the right shows an example.
Flat base	Expect a large rise if the double bottom appears after a long, flat base. Use the weekly scale to find the flat base – the double bottom will look like a pothole in a road. The figure to the lower right shows an example.
Trends	A short-term decline leading to the double bottom results in the best post breakout performance.	Flat Base
Yearly low	Double bottoms within a third of the yearly low perform best. The link to the left discusses performance and this link provides more information.
Volume trend	A downward volume trend suggests good post breakout performance. The link on the left shows an example and provides a list of chart patterns that perform best after a downward volume trend.
Throwbacks	Throwbacks hurt post breakout performance. The link to the left defines a throwback and this link discusses performance.

Example

The figure shows an example of an Adam & Adam double bottom chart pattern. The two Adam bottoms are pointed needles with a good rise between them (point B) and they appear after a downward price trend. The Adam & Adam double bottom confirms as a valid chart pattern when price closes above point B, shown as the lower horizontal blue line.

To calculate a price target, subtract the price of the lower of the two Adam valleys from the price at peak B (the highest high between the two bottoms) to get the height. Multiply the result by 66% (the percentage meeting price target from Important Bull Market Results table near the top of this page) and add the result to B. That gives a target of 4 cents above C. Even though price fell short of the target, overhead resistance highlighted by the green line doubled as a good price target, indicating profits should be taken near there.

Other Examples

• Adam & Adam double bottom in GLD.
• Adam & Adam double bottom in CACH.
• Adam & Adam double bottom in GGC.

-- Thomas Bulkowski