Trading Price Action Reversals: Technical Analysis of Price Charts Bar by Bar for the Serious Trader

CHAPTER 8

Double Top and Bottom Pullbacks

If a market forms a double bottom after a sell-off, and before the bull trend takes off, and it then has a higher low pullback that tests just above the double bottom low, this is a double bottom pullback long setup. The double bottom does not have to be exact, and the second bottom is often slightly lower than the first, making the pattern sometimes also a head and shoulders bottom. If the second bottom does not at least reach the first, there is a risk that the bottom is forming only a two-legged sideways to up correction, thereby making it better to look for a scalp long rather than a swing. A double bottom (or top) pullback pattern can be thought of as a three-push bottom (or a triple bottom or triangle) where the third push down did not have strong-enough sellers to create a new low. The pattern always forms at a support level, as does every move up in a bear trend. If the move up from the first of the three bottoms is strong enough, traders will wonder if the trend is evolving into a trading range or even a reversal into a bull trend. In a trading range, every move down is a bull flag and every move up is a bear flag. If the market is in the early stages of a bull trend, then every move down is also a bull flag. Whether the market is entering a trading range or a new bull trend, the sell-off from the first rally is a bull flag, even though it falls to around the level of the first bottom. The rally off the double bottom is a breakout ...