Bottoms Up

Don’t call it a comeback, but stocks refuse to be put down.

The Dow Jones Industrial Average (DIA) snapped a five-day slide last Friday as hopes for crude oil production cuts outweighed global recession fears. The DJIA closed up more than 300 points, or 2%.

Since then, all three major U.S. averages have made big gains.

Now, traders are feverishly hunting for confirmation of a downtrend reversal – essentially the green light to buy.

Last week, I introduced you to the “ascending triangle” chart pattern. You’ll recall this popular technical stock pattern often follows sharp selloffs, like we saw in January.

Today, I’m going to show you an even more important reversal pattern.

“W” Marks the Spot

When uncertainty looms, the dance between the bulls and bears can become violent.

Fear is contagious, which can drive sharp selloffs. Then, once the bears have exhausted themselves, the bulls rush in with force. Sometimes, that’s all it takes for an uptrend to resume course.

However, if the ensuing rally fails to find support along higher lows, a security will retest its recent low.

This price action often sets up what’s known as a double bottom chart pattern. And this key reversal pattern can be very profitable for observant traders.

Here’s what the pattern looks like:

Most traders will wait for a breakout above the double-bottom resistance line. If the resistance becomes support, then investors can take new positions and confidently expect more upside.

Aggressive traders might take a position on the second upswing, ahead of the retest of the double bottom high.

This approach is riskier, but it can be more profitable if the uptrend holds.

From a top-down perspective, the Dow and S&P 500 have both produced double bottom patterns after January’s vicious selloff.

Both indices are also on their way to re-testing January highs – the level of current double-bottom resistance. A breakout above this line for either index bodes very well for stocks over the next few months.