TRIPLE BOTTOM PATTERN – Part 2: Important Characteristics

Re-visit Part 1: Triple Bottom Formation

Important Characteristics of Triple Bottom Pattern

Existing Trend:
There should be an established existing DOWNWARD trend prior to the pattern.

Shape of Triple Bottom Pattern:
1) The Three Bottoms:
The bottoms should be sharp and distinct / well separated. The price bottoms do not have to be exactly the same, but it should appear reasonably equivalent to each other.
If the last bottom (3rd bottom) is higher than the middle bottom (2nd bottom), there is a relatively higher chance of stronger price increase. A higher bottom in the last bottom might indicate weaker selling pressures, as the sellers attempt to push the price down to the previous low or make a new low but fail, suggesting that the selling pressures might have started to subside.

2) The Two Peaks:
The highs of the peaks can appear more rounded.

Duration:
Triple Bottoms pattern can be considered a long term pattern.
The duration of the formation of the pattern can take several months, normally range from 3 to 6 months, with an average of about 4 months. Normally, the formation of Triple Bottoms should take longer time and less volatile in price swing than Triple Tops. Hence, bottoms tend to be wider (due to longer duration to develop) and flatter (as a result of less volatile price swing) than tops.
Basically, the longer the time duration the pattern takes to develop, the more likely the pattern could work out as a reversal pattern or the stronger the price might move once the breakout occurs.

Breakout:
Even when the price has risen from the 3rd bottom, the pattern is not completed yet. The chances that the existing downtrend will continue are still higher than the chances of reversal to take place, as it is normal during a downtrend for the price to test a support level a few times, and then bounce up, and then resume the downtrend again.

Triple Bottom pattern is only completed and confirmed when the price increases and closes above the highest highs of the peaks in between the 3 bottoms, which serves as the key resistance level in this pattern. This highest high is called the “Confirmation Point”.

Remember that we should always assume the existing trend (i.e. in this case is downtrend) is in force unless proven otherwise.
Therefore, it is important to wait for the price to make a decisive breakout by breaking through and closing above the Confirmation Point, accompanied with an increase in volume, in order to avoid jumping the gun and/or prevent deceptive Triple Bottoms pattern.

In addition, as Triple Bottoms is forming, the formation may also resemble few other patterns. Before the 3rd bottom is formed, the pattern may look like Double Bottoms (reversal pattern). The three equal lows may also be seen in Rectangle pattern (neutral pattern) or Descending Triangle pattern (bearish continuation pattern).
Nevertheless, all these patterns have similar principle to follow, which could help differentiate between the above patterns or avoid jumping the gun: Always wait for the decisive breakout to occur before entering into any trade.

Breakout Confirmation:
Sometimes, the price may also make a deceptive/invalid breakout whereby it touches above the Confirmation Point, but then it moves back down again & resumes downtrend.
One possible way to prevent this is by having certain criteria to confirm if the breakout is a valid one.
A minimum penetration criteria for a breakout should be the price closes ABOVE the Confirmation Point, not just an intraday penetration.
Some traders may apply certain price criteria (e.g. 3% - 5% break from the Confirmation Point depending on the stock’s volatility) or time criteria (e.g. the breakout is sustained for 3 days) to confirm the validity of the breakout.

Volume:
Volume should be higher during the formation of the 1st bottom and then get lighter as the pattern develops the subsequent two bottoms, showing an indication that the selling pressures are getting weaker.
The volume may sometimes pick up when the price hits each of the bottoms, but overall, volume tends to be diminishing as the pattern is forming.
During & after the breakout of the Confirmation Point, the volume should significantly increase again.
When during the increase from the 3rd bottom, the price experiences an accelerated rise, perhaps with a gap up or two, accompanied by an expansion in volume, this might give a good sign, as the price increase tends to rise further, and hence it may provide higher chances that the pattern is bullish reversal pattern.

Potential Price Target:
1) Compute the height of the pattern: The distance between the lowest low of bottoms (which serves as the support) and the highest high of the peaks (i.e. the Confirmation Point, which serves as the key resistance).
2) To compute the potential price target: Add the result to the Confirmation Point (i.e. the highest high of the peaks).

In general, any price target should only be used as a rough guide. To determine the price target, other factors, such as previous support / resistance levels, Fibonacci retracements, or long-term moving averages, should be considered as well.

Return to Breakout Level:
After the breakout occurs, it is common that prices may return to the breakout level for an immediate test of this new support level before continuing their moves in the direction of the breakout. (Remember that the resistance now has become a new support level).
This could actually offer an opportunity to participate in the breakout with a better reward to risk ratio.

To find out more about other Chart Patterns, please refer to:
Learning Charts Patterns

Related Topics:
* Free Trading Educational Video: Learn Technical Tips from Dan Gramza
* Learning Candlestick Charts
* Options Trading Basic – Part 1
* Options Trading Basic – Part 2
* Understanding Option Greek
* Understanding Implied Volatility (IV)
* Understanding Option’s Time Value

Analysis Tool:
Get Free Trend Analysis for your favorite symbols