A widely used pattern in technical analysis, the double bottom pattern is a bullish pattern that signals the potential for significant price increase after a lengthy period of downward price movements. This pattern began to be widely used after the second half of the 20th century. The first part of the double bottom pattern is formed when the price of a financial asset falls and then rises. When the price falls and rises once again, the formation is complete.
The First Low
The first low occurs when the price of a financial asset enters an uptrend after a strong downtrend. However, this rise is short-lived, and the price loses strength again and enters a downtrend.
The Second Low
The second low occurs right after the short-term uptrend. The second low occurs due to the lowering of the previous downtrend and increasing buying pressure. Investors predict that the second low will occur somewhere above the first low. The second low is interpreted as a bullish signal.
The neckline, or resistance level, is the first point where the rising price will get stuck after the second low. The closing of the price above the neckline of the financial asset is interpreted by investors as a strong buy signal. However, the double bottom pattern does not guarantee future price movements. Investors should always conduct fundamental and technical analysis before making any investment decisions.