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High-Probability Trade Setups: A Chartist's Guide to Real-Time Trading by Tim Knight

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Chapter 16

Multiple Bottoms

Stocks that enter long bullish runs do not do so by suddenly reversing from a downtrend. They almost always need to establish some kind of base first, and the form this base takes varies from stock to stock.

One of the most common and easy-to-understand bases is that of a multiple bottom. You will often see references to double bottoms and, less frequently, triple bottoms, but the fact is that stocks might hit a certain low level four, five, six, or more times before finally gathering up the buying power to push much higher. This chapter examines instances of stocks hitting multiple bottoms and then moving on to very substantial gains to the upside.

DEFINITION OF THE PATTERN

The first requirement of a multiple bottom is that the stock has to have experienced a meaningful drop in price. After all, you cannot have a bottom if you are in the middle or top of a formation. The premise of a multiple bottom is that the stock has already suffered a serious decline, and a buying opportunity has been forming for a while at a lower price.

Just because a stock drops to a certain level a number of times doesn't mean it is forming a bottom. Those instances should:

  • Have significant amounts of time between them.
  • Experience failed attempts at rising before falling back again.
  • Ideally, exhibit diminishing amounts of volume with each instance of hitting the low.

FIGURE 16.1 DST Systems went up 190 percent after establishing a low at about $26.

The amount of time ...

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