Wednesday, July 21, 2010

Green Shoots In The Form Of Double Bottoms?

While I’ve been fully expecting the markets to continue lower for at least one more leg down, I remain open to the possibility that they could throw me a curve ball or two. It's hard to remain objective in the face of index charts that are looking so terrible, but in reviewing some charts I came across a few stocks that could be completing small double bottoms, hinting that their corrections may soon be over.

A double bottom typically resembles a "W" and forms after a downtrend. Typically, a low is formed and then the stock bounces higher before coming back to retest the first low. The important point to remember is that a double bottom is not valid until the price closes above the center peak of the "W", also known as the neckline. (For related reading, see Analyzing Chart Patterns: Double Top And Double Bottom.)

Oracle (Nasdaq:ORCL) is a good example of a stock that recently cleared the neckline of a small double bottom. While the left side of the base was a little choppy, the overall price action follows the pattern in principle. After a decline, ORCL attempted to rally reaching just over $23.50. It pulled back from this level and retested its prior lows near $21.50. It then rallied sharply to clear its June high and the neckline from the pattern. ORCL is now in the process of testing the neckline as support. If it can hold here, especially in the light of a negative IBM (NYSE:IBM) earnings report, it could rally to its projected target near $25.50. (more)

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