Shabbir Kayyumi
What is a double bottom pattern?
The double bottom pattern is a bullish reversal pattern made up of two consecutive troughs that are roughly equal, with a moderate peak in-between. The double bottom looks like the letter "W".
The twice-touched low is considered a support level. The double bottom pattern always follows a major or minor downtrend in a particular security, and signals the reversal and the beginning of a potential uptrend. A double bottom reversal pattern forms after a down-trend, and its completion marks a trend reversal to up-trend.
The double bottom pattern is an integral part of technical analysis, but successful traders combine these techniques with technical indicators and other forms of technical analysis to maximize their odds of success.
This trend line is the most important component of the double bottom pattern, a sustained trade above resistance line is considered as a breakout.
JSW Steel has managed to close above major resistance levels of Rs 245 in last week. The recent formation of a double bottom pattern has given a breakout by trading above Rs 245 mark which suggests buying in the stock for higher targets of Rs 278. Faster retracement after forming a second swing bottom is a sign of bottoming out formations and a positive close above Rs 250 gives additional confirmation. Decent volume participation in the last week is also giving support to the double bottom pattern.
Figure.1. Double Bottom pattern and Buy signal on JSW Steel Limited
Buy Signal:-
1. Recent two swing bottoms are almost equal in price indicating the proper formation of double bottom pattern; however trading above Rs 245 marks has given additional confirmation for strong bulls.
2. Recent close prices (249) are trading above the breakout line (245) of double bottom pattern indicating trend reversal to the uptrend.
3. Faster retracement after forming second swing bottom gives additional confirmation in pattern breakout.
4. Decent volume participation is also giving additional confirmation.
5. Bullish Moving average crossover of 20 DMA& 50 DMA suggests uptrend to continue further.
Profit Booking:-
Target as per Double Bottom pattern is calculated by adding to the height of trough to resistance line which comes to Rs 278. However one can book profits near the previous swing high which is around Rs 272.
Stop Loss:-
The entire bullish view negates on breaching of the mid-point of the entire valley on a closing basis, and one should exit from their long position. In the case of JSW Steel, it is placed around Rs 227 levels.
Conclusion
We recommend buying JSW Steel around Rs 242-246 with a stop loss of Rs 227 for higher targets of Rs 278 as indicated in the above chart.
The author is Head - Technical & Derivative Research, Narnolia Financial Advisors Ltd.
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