“Double bottoms” and “double tops” are terms that you hear tossed around by analysts that sound great, but that many people don’t truly recognize.
A double bottom is simply a price level that a stock falls to and then bounces off of twice. A double top is the exact opposite, the stock runs up to a resistance level or high and then rebounds back downward twice; the basic concepts of tops and bottoms are the same but, for the purposes of this story, we’ll focus on double bottoms.
Let’s look at how you can filter for stocks exhibiting a double bottom pattern and combine it with catalyst events to profit on the long side.
Working on www.finviz.com using its screener, filter for stocks with a double-bottom pattern. Additionally, you can filter for stocks in different industries and sectors, as with other key metrics.
Here’s a look at the screener for stocks with a double-bottom pattern, a market cap greater than $300 million and average daily trading volume over 750,000 shares.
Now let’s examine Recro Pharma Inc. (REPH), a biotech stock that had a catalyst event and a double bottom.
Look at the blue horizontal line and the boxes below it, and you’ll see that REPH formed a double bottom here. The stock had some data released for one of its treatments prior to this formation, and here’s a look at the drug and indication.
With the catalyst and the formation in place, you might have considered getting long the stock once you finished your due diligence. Here’s what happened next:
The stock is still forming the double-bottom pattern, but if you got in right around the support area, you would have some profits.
The double-bottom pattern is a commonly used reversal pattern and can be helpful when combined with catalysts and strong fundamentals. Practice spotting these patterns so that you recognize them quickly and easily, making them a particularly useful part of your trading toolbox.
Kyle Dennis runs Kyle Dennis’ Biotech Breakouts (biotechbreakouts.com). He is an event-based trader, who prefers low-priced and small-cap biotech stocks.