Triple Bottom Reversal
The Triple Bottom Reversal is a bullish reversal pattern typically found on bar charts, line charts and candlestick charts. There are three equal lows followed by a break above resistance. As major reversal patterns, these patterns usually form over a three to six-month period.
Note: A Triple Bottom Reversal on a bar or line chart is different from Triple Bottom Breakdown on a P&F chart. Triple Bottom Breakouts on P&F charts are bearish patterns that mark a downside support break.
We will examine the elements of the pattern and then look at an example.
Prior Trend. With any reversal pattern, there should be an existing trend to reverse. In the case of the Triple Bottom Reversal, a clear downtrend should precede the formation.
Three Lows. All three lows should be reasonably equal, well-spaced, and mark significant turning points. The lows do not have to be equal but should be reasonably equivalent.
Volume. As the Triple Bottom Reversal develops, overall volume levels usually decline. Volume sometimes increases near the lows. After the third low, an expansion of volume on the advance and at the resistance breakout greatly reinforces the soundness of the pattern.
Resistance Break. Like many other reversal patterns, the Triple Bottom Reversal is incomplete until a resistance breakout. The highest point of the formation, which would be the highest of the intermittent highs, marks resistance.
Resistance Turns Support. Broken resistance becomes potential support, and there is sometimes a test of this newfound support level with the first correction.
Price Target. The distance from the resistance breakout to lows can be measured and added to the resistance break for a price target. The longer the pattern develops, the more significant the ultimate breakout. Triple Bottom Reversals that are 6 or more months in duration represent major bottoms, and a price target is less likely to be effective.
As the Triple Bottom Reversal develops, it can start to resemble several patterns. Before the third low forms, the pattern may look like a Double Bottom Reversal. Three equal lows can also be found in a descending triangle or rectangle. Of these patterns mentioned, only the descending triangle has bearish overtones; the others are neutral until a breakout occurs. Similarly, the Triple Bottom Reversal should also be treated as a neutral pattern until a breakout occurs. The ability to hold support is bullish, but demand has not won the battle until resistance is broken. Volume on the last advance can sometimes yield a clue. If there is a sharp increase in volume and momentum, the chances of a breakout increase.
After a failed double-bottom breakout, ANDW formed a large Triple Bottom Reversal.
While the new reaction high (black arrow) and potential double bottom breakout seemed bullish, the stock fell back to support.
Technically, the downtrend ended when the stock formed a higher low in March 1999 and surpassed its Jan 1999 high by closing above $20 in July 1999 (black arrow). Even though the downtrend ended, it would have been difficult to label the trend bullish after the third test of support around $11.
Over 13 months, three relatively equal lows formed in Oct 1998, Mar 1999, and Nov 1999. When the Jul 2000 high surpassed the Jan-99 high, the possibility of a rectangle pattern was ruled out.
Resistance at $22.50 was broken in Jan 2000. The stock closed above this key level for five consecutive weeks to confirm the breakout.
Even though volume expanded near the second and third lows, the 10-day EMA of volume declined between the lows. The advance off of the third low saw a dramatic expansion of volume that lasted many weeks. The Accumulation/Distribution Line formed a positive divergence in 1999, breaking to new highs with the stock in Jan 2000.
After the resistance break, the stock fell below $22.50 twice over the next two months. Based on the Feb 2000 and Apr 2000 lows, a new support level was established at $20. Because upside movement was limited after the breakout (a high of $25.50), a pullback below $22.50 might have been expected. Based on Oct 1999 resistance, critical support could have been marked at $18.50.
ANDW built a base over 13 months. Although the pattern's height is relatively impressive, it pales in comparison to its length. The length of this pattern and subsequent breakout suggest a long-term change of sentiment.
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