Double bottom is a trend reversal chart pattern formed after prolonged downtrend. Let’s look at picture shown below, At point A, the downtrend is proceeding as expected with no signs of a bottom and takes corrective push up to point B, Then market dips again to point C, and isn’t able to reach the bottom of the previous trough at point A. To continue an downtrend, each low point must be lower than previous one. The failure to break previous low at point C fulfils half of the requirement for equal low.
By this time, the major down trend line (1) has already been broken, usually at point B, constituting another danger signal but, despite all of these warnings, all that we know at this point is that the trend has shifted from down to sideways. This might be sufficient cause to liquidate short positions but not necessarily enough to justify new buy. By this time, a flatter trend line (2) can be drawn under the last reaction highs, which is called a neckline.The market has now violated the trend line (2) along the top of points B, completed the requirement to, a new uptrend-ascending peaks and troughs. The new uptrend is now identified by the higher highs and lows at points C, D, and E.
By this time, the major down trend line (1) has already been broken, usually at point B, constituting another danger signal but, despite all of these warnings, all that we know at this point is that the trend has shifted from down to sideways. This might be sufficient cause to liquidate short positions but not necessarily enough to justify new buy. By this time, a flatter trend line (2) can be drawn under the last reaction highs, which is called a neckline.The market has now violated the trend line (2) along the top of points B, completed the requirement to, a new uptrend-ascending peaks and troughs. The new uptrend is now identified by the higher highs and lows at points C, D, and E.