A Double-bottom is a reversal pattern that tends to occur during severe market sell-offs, as in the example below of the chart for Qantas when it was at its most down trodden. The pattern acts as a major reversal signal that forms after just such an extended downtrend. Although the Qantas chart is a daily chart that shows a double bottom forming over 4 weeks, It should be noted that a double bottom is best in a weekly pattern that forms over a few weeks to many months, with the preferred period being 1-3 months.
As its name implies, the pattern is made up of two consecutive troughs that are fairly equal, with a defined peak between them. Although there can be variations, along with many potential double bottoms during an extended down trend, the 'text book' double bottom usually marks an intermediate or long-term change in trend. It is important to note that the reversal pattern is not confirmed until the key resistance or neckline is broken, as shown in the QAN chart. This confirmed a change in the trend. In the Double Bottom pattern, the initial trough can look like a continuation of the downtrend.
The Daily Trader report of the 27th July gave Qantas as a buy on stop at $3.14 based upon the assumption that this was a double bottom and that $3.14 was a break of the neckline. This trade was triggered on the 16th August and has so far shown a clear change in trend, and using the basic trailing stop exit strategy outlined in the Daily traders companion is returning a very nice profit (11% at the close of trade today). Although the Qantas rise has been assisted by fundamental news a double bottom price target is said to be; The distance from the resistance breakout to trough lows can be added on top of the resistance break. This would imply that the bigger the formation is, the larger the potential advance.