From Investor's Business Daily
Two Shakeouts Help Build A Sturdy Double-Bottom Base
Thursday October 9, 10:05 am ET
By David Saito-Chung
The previous two columns described two versions of the cup-with-handle base. It's one of the most common chart patterns seen in superior stocks right before they make their biggest price moves.
Investors wishing to earn above-average returns from growth stocks should commit another pattern to memory: the double-bottom base.
Unlike the cup, a double-bottom base features two pronounced sell-offs, not one. After falling at least 10% from its high in a short period, the stock bounces back, aiming at a new high. But the rally comes up short and the stock heads back down again, shaking out uncommitted investors a second time.
A strong stock eventually halts this decline and turns upward again. This completes a W-like pattern on the chart. Ideally, the second low should undercut the first, but it's not a must. Two good shakeouts leave the stock in sturdy hands.
The moment to grab shares comes when the stock surges 10 cents past the middle peak in between the two lows. A stock might also form a handle on quiet trade, and the pivot point would then be 10 cents above the high of the handle. The breakout should occur on volume at least 50% higher than average.
Many big winners carved a double bottom before taking off to new highs. They include American Power Conversion in 1989-90, Cisco Systems in October 1990 and Sun Microsystems in 1998. For a more recent example, consider the 18-week double-bottom base eBay formed from June to October last year.
The online auction site slipped 20%, from 64 to 51, in July 2002 as the market sold off (Point 1). The stock then rallied back to 61.99 by August (Point 2), but failed to gain more ground as the market's rebound ran out of gas. The second leg down took out its previous low (Point 3). The big indexes such as the Nasdaq and S&P 500 also formed double-bottom patterns.
EBay then rallied for three weeks in a row on heavy trade. In the week ended Oct. 25 (Point 4), the stock rolled past the pivot point of 62.09, or 10 cents above the base's middle peak. The major averages had followed through just a few weeks earlier on Oct. 15. The stock pulled back a bit, but never fell more than 7% below the pivot. It later formed a six-week flat base and broke out again Jan. 6.
At the time, eBay's 98 Earnings Per Share Rating and A SMR grade made it one of the top Internets to survive the bear market. The stock has gained 90% from its breakout.