Double Bottom pattern in Tata Steel suggests buying opportunity

A double bottom reversal pattern forms after a down trend, and its completion marks a trend reversal to up trend. 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 double bottom pattern, a sustained trade above resistance line is considered as a breakout.

Why to Buy Tata Steel Limited?

Tata Steel Limited has closes above major resistance levels of Rs 380 in last week. Recent formation of double bottom pattern has given a breakout by trading above Rs 380 marks which suggests buying in the stock for higher targets of Rs 435.

Faster retracement after forming a second swing bottom is a sign of bottoming out formations and a positive close above yesterday’s high gives additional confirmation. Decent volume participation in the last week is also giving support to double bottom pattern.

Figure 1: Double Bottom pattern and Buy signal on Tata Steel

Buy Signal:-

1. Recent two swing bottoms are almost equal in price indicating proper formation of double bottom patter; however trading above 380 marks has given additional confirmation for strong bulls.
2. Recent close prices (396) are trading above breakout line (380) of double bottom pattern indicating trend reversal to 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 suggest uptrend to continue further.

Profit Booking:-

Target as per Double Bottom pattern is calculated by adding height of trough to resistance line which comes to Rs 440, however one can book profits near previous swing high which is around Rs 435.

Stop Loss:-

Entire bullish view negates on breaching of mid-point of entire valley on closing basis and one should exit from long position. In case of Tata Steel, it is placed around RS 354 levels.

Conclusion

We recommend buying Tata Steel around 380-390 with a stop loss of 354 for higher targets of 435 as indicated in above chart.

(The Author is Head - Technical & Derivative Research, Narnolia Financial Advisors)

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