Triple Bottom Technical Analysis
Technical analysis is a broad field of studying price charts for stocks, futures, options, bonds and other investment vehicles. While it is possible to make informed predictions on market behavior using other types of analysis, a technical analyst focuses strictly on the price chart. Successful traders using technical analysis may not know anything about a company's actual business operations. Instead, they scrutinize price patterns to glean insight into future share prices. A "triple bottom" is one of these patterns.
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Purpose
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Identification of a triple bottom in any financial market can be a meaningful observation about current market behavior. Patterns such as the triple bottom are identified for the purpose of predicting future price action. As these patterns occur often, traders can confidently speculate about imminent price activity based on the historical success of these patterns. A triple bottom will often be a key reversal signal that precedes a major market reversal in the opposite direction.
Definition
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A triple bottom resembles the sequence of "WV" letters on a price chart. That is, prices decline, bounce back, decline again to the previous point and bounce and decline one more time. The critical component of a triple bottom is the price point reached during each decline. A triple bottom can only be identified when these lows are nearly at the same price level. If it is possible to draw a straight horizontal line between the three lows on the chart, then a triple bottom is in place. The triple bottom can occur on any time frame, from daily charts to minute-based intraday charts.
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Cause
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The triple bottom occurs in a price chart due to the auction mechanism of financial markets. Prices are determined by supply and demand. When a price decline halts and reverses to form one of the lows of a triple bottom, it is because there was a strong demand at that price point to overwhelm the supply of stock being sold. During each subsequent decline, this demand remains to once again enter the market at that price point.
Support
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The term used to identify a key price point, below which prices are unable to penetrate, is called "support." A triple bottom is one of the clearest visual examples of support. The reasons for support to exist at a certain price point are many. In a corporate stock, the company's earnings and valuations may cause share prices to be too much of a bargain after a certain point. Buyers rush in whenever they see the stock fall to such an extreme. Market conditions can also cause buyers to repeatedly reenter at a certain price point. Existing shareholders may recognize that the previous decline was a great place to enter. Having witnessed their portfolios gain from this price level, they enter again in the hopes of increasing their exposure to more gains.
Warning
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No chart pattern is foolproof. A triple bottom forms due to strong and persistent selling by bearish investors and traders. While the support line indicates a halt to their actions, it is possible that the previous demand that caused the pattern to form may eventually die down and succumb to the overwhelming selling pressure. If this happens, prices are not likely to reverse as expected.
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References
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