The Hindu Business Line : Tech School

Triple bottom reversal patterns are relatively rare to spot in charts though it does not diminish their utility in identifying major reversals in trend. The triple-bottom is formed by three consecutive troughs. The trend-line joining the two intervening peaks ought to be penetrated with high volumes in order to confirm and mark the completion of the pattern. Volumes are seen to decrease with each succeeding troughs whereas it expands once the break-out above the trend-line happens.

The significance of a support increases once the price reverses higher after an attempt at penetrating that level. If the stock fails thrice at declining below a certain level, the confidence among investors that the stock has bottomed gains force and results in a meaningful rally.

The measuring implication for the triple bottom is similar to that of triple tops and head and shoulders. The distance between the lowest trough and the trend-line is measured and added to the break-out point to give the level to which the ensuing rally can take the stock.

Since the sentiment is bearish during the decline preceding the triple bottom, number of traders would be holding short positions at the first trough. The rally succeeding the first trough is mainly propelled by these short positions getting covered. Once these positions are covered, the rally loses steam and the second trough is formed. But short sellers lose conviction on repeated attempts to penetrate the support and this in turn translates in to lower volumes in succeeding troughs.

The chart below of Areva T&D shows a triple bottom reversal pattern. Note the contracting volume with the successive troughs and volume expansion during price break-out.

It is not imperative for the troughs to be formed at exactly the same level. They can be 1 to 3 per cent higher or lower than the preceding troughs. But if the second and third trough are formed at higher levels than the first, it is a positive since it reflects buying interest. It is also common to face difficulty in differentiating between an inverse head and shoulders and a triple bottom pattern. In inverse head and shoulders, the second trough is the lowest and the first and third troughs are formed at roughly the same level. This need not be so in triple bottom pattern.