A triple bottom pattern displays three distinct minor lows at approximately the same price level. The triple bottom is considered to be a variation of the head and shoulders bottom. Like that pattern, the triple bottom is a reversal pattern.
|Triple Bottom Chart Pattern
The only thing which differentiates a triple bottom from a head and shoulders bottom is the lack of a "head" between the two shoulders. The triple bottom illustrates a downtrend in the process of becoming an uptrend. It is, therefore, vital to the validity of the pattern that it commence with prices moving in a downtrend.
Elaine Yager, Director of Technical Analysis at Investec Ernst and Company in New York and a member of Recognia's Board of Advisors goes further to say that this pattern must commence with prices moving in a major downtrend - one that has lasted for one year or more.
What does a triple bottom look like?
As illustrated below, the triple bottom pattern is composed of three sharp lows, all at about the same price level. Prices fall to a support level, rise, fall to that support level again, rise, and finally fall, returning to the support level for a third time before beginning an upward climb. In the classic triple bottom, the upward movement in the price marks the beginning of an uptrend.
Investors should note that the three lows tend to be sharp. When prices hit the first low, sellers become scarce, believing prices have fallen too low. If a seller does agree to sell, buyers are quick to buy at a good price. Prices then bounce back up. The support level is established and the next two lows also are sharp and quick. Bulkowski points out that the sharp lows are often only one-day spikes.
While the three lows should be sharp and distinct, the highs of the pattern can appear to be rounded. The pattern is complete when prices rise about the highest high in the formation. The highest high is called the "confirmation point."
This pattern, the experts warn, can be easily confused with other similar patterns. For example, if the center low is lower than the other two, the pattern may be a head and shoulders bottom. Also, if the three bottoms are successively higher or lower than one another, the pattern may be a triangle formation.
Because the pattern is easy to confuse, an investor should look for three sharp lows which are well separated and not part of a larger congestion pattern. In addition, between the lows, the highs should be fairly rounded in shape, although it is not absolutely necessary to the validity of the pattern. If the pattern fails to move up and break through the confirmation point after reaching the third low, the pattern is not a valid triple bottom.
Why is this pattern important?
Like the head and shoulders bottom which it so closely resembles, the triple bottom is considered to be a reliable pattern. Bulkowski estimates the failure rate to be a low 4%, assuming that an investor waits for the upside breakout through the confirmation point.
Is volume important in a triple bottom?
Generally, volume in a triple bottom tends to trend downward as the pattern forms. Volume tends to be lighter on each successive low. Volume then picks up as prices rise above the confirmation point and break into the new upward trend.
An investor should not dismiss a triple bottom if volume does not display this pattern. The pattern can take several months to form and, during that time, volume can be irregular and unpredictable. Volume should be higher at the lows than on the days leading to the lows.
What are the details that I should pay attention to in the triple bottom?
1. Duration of the Pattern
The average formation takes approximately four months to develop. The triple bottom is one of the longer patterns to develop. Schabacker and Murphy agree, however, that the longer the pattern takes to form, the greater the significance of the price move once breakout occurs.
2. Need for a Downtrend
The triple bottom is a reversal pattern. This means it is essential to the validity of the pattern that it begin with a downward trend in a stock's price. As Yager noted above, some experts believe the downtrend must be a major one.
3. Decisive Breakout
Because a triple bottom can be confused with many other patterns as it is developing, experts advise that investors wait for a valid breakout through the confirmation point before deciding whether the pattern is a true triple bottom. Bulkowski reinforces this message, stating that true triple bottoms are quite rare and waiting for a valid breakout is essential before determining whether the pattern is a triple bottom.
As discussed, it is typical to see volume diminish as the pattern progresses. This should change, however, when breakout occurs. A valid breakout should be accompanied by a burst in volume. Certain experts are less concerned by seeing a steadily diminishing trend in volume as the pattern progresses through its three lows.
5. Pullback after Breakout
It is very common in the triple bottom to see a pullback after the breakout. Bulkowski estimates that 70% of triple bottoms will throw back to the breakout price.
How can I trade this pattern?
Begin by calculating the target price - the minimum expected price move. The triple bottom is measure in a way similar to that for the head and shoulders bottom.
Calculate the height of the pattern by subtracting the lowest low from the highest high in the formation. Then, add the height to the highest high. In other words, an investor can expect the price to move upwards at least the distance from the breakout point plus the height of the pattern.
For example, assume the lowest low of the triple bottom is 200 and the highest high is 240. The height of the pattern is 40 (240 - 200 = 40). The minimum target price is 280 (240 + 40 = 280).
Experts agree that triple bottoms are not that common.
Edwards and Magee, for example, stress the necessity for waiting for a valid breakout through the confirmation point.However, this is a reliable pattern if the pattern has been confirmed by a valid breakout. Pullbacks are common with triple bottoms. Investors can use this to their favor advises Bulkowski. If prices return to the confirmation point quickly after the breakout (within two weeks but no more than a month), Bulkowski suggests that the time to jump in is once the prices have turned around again and headed back up.
Investors looking for a valid triple bottom should be wary of a pattern that shows a lot of white space as it is developing. The pattern should display a fairly regular progression among the three, well-separated lows. Yager suggests that the symmetry of this pattern is something that should catch your eye.