Double bottom is a chart pattern where the price of the stock drops to a certain level, recovers back moderately and then again drops back to the level where it moderately recovered from.

Double bottom is a good support level for a stock. It indicates that this is the level where the stock witnesses some buying interest come in. Usually stocks hold onto double bottom levels. This is one of the mostly used Patters, along with Double, Tripe Tops.

The Double Bottom acts as a Support levels, below which the stock is likely to see some more downside. Normally Stop-loss’s should be placed a these levels, as a price below this suggest negative trend in the near term.

Below is an example. Lets take a chart of a stock named: Raj Oil Mills Ltd (NSE code: RAJOIL)

Chart shown below is from October 2009 through August 2010.

In November 2009, stock made a low of 57-60 and bounced back to 85 in near term. Then again In April 2010, stock made a low of 60 and saw buying interest come in, which took the stock price back higher to 70 levels. By now 57-60 which was a double bottom for the stock acted as a good support level since it had bounced back twice from this level.

In the month of May 2010, stock was witnessing selling pressure. From 05-05-2010 till 18-05-2010 stock was moving in a tight range of 57-60 which was its strong support level. Between this time stock did not close above 60 neither closed below support of 57. This indicated that could turn a bit weak in coming days as it was not seeing any good buying interest near support levels.

raj-oil-mills

On 19th May 2010, it closed at 56.15, below support of 57. In coming days, it was unable to move again above 60, this indicated that stock was turning weak. Soon, stock witnessed fresh selling pressure and it slide down to 48 in the month of June where it found some support.

Double bottom can be used as a technical indicator for short term/swing trading. Stocks can be bought near double bottom levels with a small stoploss below the support level.