Talking Technicals – Tripple Bottom

During the first presidential debate with Obama, Republican candidate Mitt Romney brought up coal during a discussion of energy policies. “By the way, I like coal. I’m going to make sure we can continue to burn clean coal,” said the former head of Bain Capital. Romney also said, “People in the coal industry feel like it’s getting crushed by your policies” Since there really hasn’t been any other justification for the recent rise in coal prices, Romney’s support of coal seems to have been the driver of higher prices. In reality, I guess I could’ve just as easily filed this article under “In the News’, but since I love a good chart pattern, we’ll stick with that.

Triple Bottom

Triple bottoms are as simple as they sound, and because of that, pretty easy to recognize. Just imagine a stock or other security “bouncing” in the same price range on back-to-back-to-back occasions.

Triple bottoms are generally considered to be reversal patterns, meaning that they usually form at the end of a stock’s downtrend. You can see from the diagram above where the pattern gets its name: A triple price bounce in the same area. Think of it as simply a bottoming process. If this type of pattern forms in the midst of an up or sideways trend, then it is not considered to be a triple bottom because the stock in question isn’t “bottoming”.

Just like any other chart pattern, a triple bottom needs to “confirm”. Confirmation is simply a break of the resistance that was created by the pattern. If the resistance break occurs, the stock should continue to move higher overall. If you miss the initial breakout on a triple bottom, keep your eyes open for a “retest” of the previous resistance as a new support.

A great example of this formation is found on a stock that is currently in my own watchlist- WLT (Walter Energy, Inc.). The company is within the basic materials sector, specifically the industrial metals and minerals industry. If you look at my chart below, you can see that WLT has formed a textbook example of a triple bottom price pattern.

And there you have it, a perfect example of a potential triple bottom pattern (green)! Why do I say, “potential”? Remember, the pattern needs to confirm by breaking above the $40 resistance (red). An added bonus to the pattern formation is the increase in volume (blue) as WLT has moved higher. This increase in volume is adding validity to the recent rally in the stock.

Before making any trading decision, remember to consider which side of the trade you believe gives you the highest probability of success. For example, analyze the overall market to see which direction it is trending. Making this type of decision ahead of time will help you decide which side of the trade you believe gives you the best opportunities. Regardless of your strategy, or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade.

Good luck and great profits!

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About the Author: Todays Big Stock