Double Bottom 102808

How To Recognize Great Performing StocksYour guide to spot the double bottom chart pattern.

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How to Recognize Great Performing Stocks

In this 16-page booklet, you will continue your education on be-coming a better investor and achieving financial freedom. Investor’s Business Daily is designed to make sure you’ve got the right stocks on your radar. Chart reading is all about making sure you are buying those stocks at the right time.

You’ve heard the saying, “timing is everything.” That’s especially true in the stock market. Buying at the right time, is the first step in how you handle your stock. If you don’t buy it right, chances are your holding and sell decisions won’t be right either.

So, how do charts help you? By looking at the price and volume, you get insight into the psychology of investors. After careful study, you will find the same patterns appear over and over throughout time. In fact, our database has examples of stocks from the 1890s that formed patterns similar to those in the last few years. The rea-son for the similarity is simple, human nature rarely changes.

Although we focus on chart patterns in this series of pamphlets, remember it’s only one part of the equation. You must also have strong fundamentals behind any stock you’re thinking of buying...Stocks with significant percentage increases in their recent quarterly earnings per share and sales growth and a high return on equity. These strong fundamentals will usually be due to a new product or service, or an important change in industry conditions. The point is, you have to know a good deal about the company and its prospects before committing your money to it as an investment.

The Double Bottom Pattern

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Old high

Base Length - base should occur over at least 7 weeks, but can last longer.

The base correction tends to be more severe but still usually corrects no more than 40% from the peak (left side).

Second bottom should slightly undercut the first bottom.

Buy point occurs when the stock clears the middle of the “W” on heavier than normal volume, usually at least a 50% increase above average.

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After the Cup-With-Handle, the second most common highly suc-cessful chart pattern is named the Double Bottom. It is easy to iden-tify as it simply looks like the letter “W.” The only difference is the second leg of the W should go a little lower than the first. This acts as a shakeout of weaker investors.

The pivot, or buy point of the double bottom is just as the stock surpasses the middle of the “W” as it’s coming up from its second bottom. In some cases, a double bottom may form a handle area, in which case the buy point will be 10 cents above the high of the handle, just like the cup-with-handle.

You should use this pamphlet to get a solid idea of what past dou-ble bottom patterns looked like, so you can recognize this pattern in stocks during future market uptrends. It’s also important to re-member that 90% of the time these patterns form when the general market is in a correction, when you are least likely to be thinking of what your next investment should be.

As always, you can see more educational examples in Investor’s Corner in IBD. Plus, visit our web site, Investors.com to view more samples in the education section and video examples in the Daily Stock Analysis.

The chart on the next page gives you definitions of key features included in IBD chart examples. You can use it as an additional reference as you go through this booklet.

We look forward to helping you become a more successful investor.

William J. O’Neil

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Copyright © 2008 Investor’s Business Daily, Inc. All rights reserved

C

E

D

A

B

Double bottom description:Point A = beginning of base patternPoint B = bottom of first legPoint C = middle of “W” which sets the buy pointPoint D = bottom of second legPoint E = buy point

Average weekly volume line

200-day moving average line

10-week moving average line

Weekly volume bars

Relative Price Strength Line Relative Price Strength Line vs. S&P 500. Uptrending line means stock is outperforming S&P 500.

All chart prices are adjusted for stock splits shown just above the weekly volume bars. So, the actual price of this stock at buy point E would have been $28 at the time, not $14.stock at buy point E would have been $28 at the time, not $14.stock at buy point E would have been

Stock splitsStock splits

Weekly ChartWeekly ChartWeekly ChartNovell Increased 373% in 61 WeeksNovell Increased 373% in 61 Weeks

High

Low

CloseClose

Thick black line means stock closed at a higher price than prior week’s close

Thin gray line means stock closed at a lower price than prior week’s close

S&P 500 correctionS&P 500 correction

16-week double bottom

Base formed during market correction.

5 Copyright © 2008 Investor’s Business Daily, Inc. All rights reserved

Delta Air Lines Increased 966% in 197 WeeksDelta Air Lines Increased 966% in 197 Weeks

10-week double bottom with handle

C

E

D

A

B

Entire airline group became a market leading sector in early 1960s due to introduction of jets which reduced travel time. This was one of the first stocks making new price highs when the new bull market began after the Cuban Missile Crisis ended.began after the Cuban Missile Crisis ended.

3 weeks tight closing prices form the handle area.

Note 2nd bottom at point D undercuts 1st bottom at point B of the double bottom pattern but stock closes relatively unchanged for week but stock closes relatively unchanged for week on increased volume.

Buy pointBuy point

Prior uptrend

Market correction

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VolumeIncreases

Double bottom pattern looks like the letter “W.” Double bottom pattern looks like the letter “W.”

Almost always, the second bottom at point D should go a little below the first bottom at point B creating a shakeout right at the very bottom.

Weekly chart prices are split adjusted for a 3 for 1 stock split of November 1963.

Syntex had a new product...the birth control pill.

The 3 quarters before buy point E, Syntex had EPS growth of +400%, +800% and +400%!

Prior uptrend

Buy point

This is a high tight flag pattern buy point

A 26% correction in the market led to a steeper 62% correction in this double bottom.

Big volumeup weeks

Syntex Increased 1173% in 42 WeeksSyntex Increased 1173% in 42 Weeks

Climax topClimax topSell


C

E

D

A

B


Amgen Increased 688% in 96 WeeksAmgen Increased 688% in 96 Weeks

Big volume shakeout, but stock closes mid-range showing support.

New issue in 1983Note: many stocks that make huge price gains are entrepreneurial compa-nies that had recently become public. According to our studies, 75% of the biggest winners were new issues at some time in the 8 years prior to their big moves.


Buy point

Stock went up another 723% before it topped in Stock went up another 723% before it topped in July, 2000 for a total return of 6,385% in 10 yearsJuly, 2000 for a total return of 6,385% in 10 years

C

E

D

A

B

At the buy point: Last 3 quarters EPS: +250%, +1000%, +4400% Last 3 quarters sales: +55%, +98%, +216% After-tax margins at their peak.

Base formed during market correction.market correction.

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Cognizant Tech Increased 717% in 193 WeeksCognizant Tech Increased 717% in 193 WeeksNew issue in 1998, another example of an entrepreneurial company

Base was forming as market was coming out of 2000-2003 bear market decline.

Note: stock pulls back into buy area, normal for some breakouts.

At the buy point:Pre-tax margins were 20%Return on equity was 27%

23-week double bottom with handle

Buy point

C

E

D

A

B


Franklin Resources Increased 168% in 16 WeeksFranklin Resources Increased 168% in 16 Weeks

At the buy point: Last 3 quarters EPS: +100%, +110% to +145% Last 3 quarters sales: +58%, +70% to +90% Return on equity: 83% Pre-tax margin: 38%

Buy point

Volume growth

Climax topClimax topSell


C

E

D

A

B

New issue in 1983 - example of an entrepreneurial company

Market correction.

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EBay Increased 282% in 115 WeeksEBay Increased 282% in 115 Weeks

At the buy point: Last 2 quarters EPS: +58%, +83% Last 2 quarters sales: +47%,+49% Return on equity: 41% Pre-tax and after-tax margins were both at their peak

Normal buy point off a double bottom is when stock exceeds price peak at Point C (the middle of the “W”).A slightly early buy could be when stock price exceeds the downtrend line drawn on the chart.Jesse Livermore’s 3-point buy rule was...buy if a stock breaks below a prior low at point B ($25.52) as this stock did at point Jesse Livermore’s 3-point buy rule was...buy if a stock breaks below a prior low at point B ($25.52) as this stock did at point Jesse Livermore’s 3-point buy rule was...buy if a stock breaks

D and then reverses back above the $25.52 low by 3 points to below a prior low at point B ($25.52) as this stock did at point D and then reverses back above the $25.52 low by 3 points to below a prior low at point B ($25.52) as this stock did at point

$28.52. This shows a shakeout happened and marks a new D and then reverses back above the $25.52 low by 3 points to $28.52. This shows a shakeout happened and marks a new D and then reverses back above the $25.52 low by 3 points to

uptrend and buy point at $28.52.$28.52. This shows a shakeout happened and marks a new uptrend and buy point at $28.52.$28.52. This shows a shakeout happened and marks a new

Base formed during bear market and eBay bottomed at the same time as the market.time as the market.

Buy pointBuy point

Another buy pointpoint


9-week double bottomC

E

D

A

B



C M E Group Increased 224% in 113 WeeksC M E Group Increased 224% in 113 Weeks

C

Buy pointE

D

A

B


5 weeks in a row stock increases in price.


At the buy point: Last 2 quarters EPS: +89%, +51% Last 2 quarters sales: +46%, +23% Return on equity: 32% Pre-tax margins 49% 40 new mutual funds purchased this stock in March 2005 quarter.


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Cisco Systems Increased 2457% in 177 WeeksCisco Systems Increased 2457% in 177 Weeks

C

Buy pointE

D

A

B13-week double bottom

Pullback into buy area.

Chart prices are all adjusted for sev-Chart prices are all adjusted for sev-eral 2 for 1 stock splits, so don’t think eral 2 for 1 stock splits, so don’t think Cisco was $1.90 at the buy point. At eral 2 for 1 stock splits, so don’t think Cisco was $1.90 at the buy point. At eral 2 for 1 stock splits, so don’t think

the buy point it was actually $27.the buy point it was actually $27.Cisco was $1.90 at the buy point. At the buy point it was actually $27.Cisco was $1.90 at the buy point. At

This all-time classic double bottom eventually went up another 3,522% from this point to its March 2000 top, for a total return of over 92,512% in under 10 years.At the buy point:

Last 2 quarters EPS: +112%, +133% Last 2 quarters sales: +150%, +155% Return on equity: 36% Pre-tax margins and after-tax margins were at their peaks.

New issue in 1990-another example of an entrepreneurial company



Price Club Increased 1074% in 211 WeeksPrice Club Increased 1074% in 211 Weeks

Buy point

Double bottom with handle

Huge volume demand is way above average volume line.

C

E

D

A

B

At the buy point: Return on Equity was 55%Company had 2 warehouse stores in San Diego. Much later they merged with Costco. Sams Club was also later copied after Price Clubs.

Double bottom base formed during market correction.

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N V R Increased 418% in 192 WeeksN V R Increased 418% in 192 Weeks

Buy point

27-week double bottom 8 weeks in a row stock closes up in price.closes up in price.

C

E

D

A

B

Entire home builder’s group goes up as interest rates continue dropping.

Although this move started during the long 2000-2003 bear market, the the long 2000-2003 bear market, the breakout did occur during a short rally after a follow-through day in the market averages which signaled a new uptrend.

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How To Recognize Great Performing StocksYour guide to spot the double bottom chart pattern.

Double Bottom 102808

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