Written by and copyright © 2005-2013 by Thomas N. Bulkowski. All rights reserved.
Think of an ugly double bottom as a double bottom in which the second bottom is significantly higher than the first. Ugly double bottoms
can help you time the entry when bottom fishing.
The average rise is exactly the same as for all double bottoms (33.7% when
compared to 1,452 double bottoms from 7/1991 to 11/2004) but the failure rate is worse, 8% (
ugly double bottoms) versus 5% for all double bottoms. The following statistics are based on a study of 562
patterns found in 100 stocks from July 1991 to July 1996. Discovered by Thomas N. Bulkowski
in March 2006.
Ugly Double Bottoms: Important Bull Market Results
Overall rank for up breakouts: 14.5 out of 23
Break even failure rate: 8%
Average rise: 34%
Throwback rate: 59%
Percentage meeting price target: 76%
The above numbers are based on hundreds of perfect trades. See the glossary for definitions.
Ugly Double Bottoms: Identification Guidelines
|Price trend||Downward leading to the chart pattern. For best performance, choose patterns at the bottom of the downtrend, not as part of a congestion region in an uptrend.|
|Shape||Looks like a double bottom with unequal bottoms. The second bottom should be at least 5% higher than the first, be similar in shape, and a consecutive
minor low (no intervening low).|
|Volume||Recedes 81% of the time|
|Breakout||Upward when price rises above the highest high between the two bottoms.|
|Confirmation||The pattern confirms as a valid one when price closes above the peak between the two bottoms. If price does not close above the confirmation price then
it's not an ugly double bottom.|
As an example, consider the figure to the right. Points 1 and 2 show the two
double bottoms after a price downtrend. The pattern becomes a true ugly double
bottom when price closes above the horizontal blue line (the word Buy points to it
in the figure).
You may think that points
A and B also form an ugly double bottom, but they do not. Price does not close above C (the highest
high between the two bottoms, shown as
the green line) before making a new low at D. That is a very important distinction.
Price must rise above the highest high between the two bottoms to confirm
the ugly double bottom as a valid chart pattern. Otherwise, you just have
more squiggles on the price chart.
Ugly Double Bottoms: Trading Tips
|Measure rule||Compute the height from the highest peak
(point C in the Measure Rule figure to the right) to
the left bottom low (A) then multiply it by the above
“percentage meeting price target.” Add the difference
to the breakout price (the price of the highest high between the two bottoms,
C) to get a price target.|
|Second Low||The second bottom (the right
one, B, in the Measure Rule figure to the right)
should be at least 5% above the left one (A).|
|Trend||The best performance comes from intermediate-term (3-6 months) downtrends leading to the chart pattern.|
|Breakout||The best performance comes from chart patterns that breakout within 3 days of completing the second bottom low.|
|Reversal||The pattern acts as a reversal of the downtrend.|
|Volume trend||If volume slopes downward, the pattern tends to perform better.|
|Avoid yearly low||Patterns with breakouts within a third of the yearly low tend to under perform.|
|Throwbacks||Throwbacks hurt performance.|
The Measure Rule
To improve performance, look for patterns with breakout day volume above the 30-day average and the bottom-to-bottom price difference of at least 5%. Ugly double bottoms
qualifying show an average rise of 39% versus 34% for all ugly double bottoms.
Ugly Double Bottoms: Trading Setup
The figure to the right shows the preferred setup. The decline begins at point 1, usually several months before the ugly double bottom.
As price nears the ugly double bottom, it declines at a faster rate, usually forming a straight-line run that approximates 45 to 60
degrees (points 2 to 3). This is the blow-off stage and it usually lasts at least a month, often 6 weeks or so. The
panic selling ends at 3 and a bounce occurs which takes price back up to 4, forming the second bottom of an unconfirmed
ugly double bottom.
After point 4, it should take just a few days (usually less than a week) for an upward breakout to occur in a strong
push upward on high volume. Price usually continues in a strong advance upward. If you see price rounding over and
closing below a trendline formed by joining points 3 and 4 and projected upward (the green sell line), then consider
selling. Unless the trendline is unusually steep, a close below the trendline means the primary decline has work left
to do and price is going lower. Save your bucks and sell immediately. Otherwise, watch the rise and monitor the 3-4
trendline. Many times, price will break this trendline several months later when the rise ends. That's the time to sell.
Ugly Double Bottom Example
The above figure shows an example of an ugly double bottom chart pattern. Price moves nearly horizontally during
October and into November and then takes a dive to the first low at 1. A higher low
occurs at 2, forming the ugly double bottom, confirmed when price closes above the
blue confirmation line. A throwback occurs but it does not close below a line connecting bottoms 1 and 2.
-- Thomas Bulkowski
Other Ugly Double Bottom Examples
Copyright © 2005-2013 by Thomas N. Bulkowski. All rights reserved. Lottery: a tax on people who are bad at math.