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TradingDay.com > Technical Analysis Tutorial

T e c h n i c a l   A n a l y s i s   T u t o r i a l
by Alan Farley

Adam & Eve & Adam

WCII Eve's rounded bottom takes longer to form than the sharp Adam spike. Look for volume to decrease as the stock heals and prepares for a new uptrend. Adam and Eve formations aren't limited to bottoms. Watch for them at the end of parabolic rallies.
   
AMAT Eve and Adam formations rarely appear but are highly profitable when they do. The emotional shift within the crowd from extreme negative to extreme positive ignites fits of buying, powering a stock out of its bottom.

The Adam and Eve Reversal demonstrates the importance of the center peak in the formation of Double Bottoms. A very sharp and deep first bottom on high volume (Adam) forms this DB pattern. The stock then bounces high into the center retracement and develops a longer and more gentle, rolling second bottom (Eve) on relatively low volatility. Price action then constricts into a tight range and the stock breaks strongly to the upside.

At times, the top of Eve is bound by a flat shelf that marks an excellent entry point when broken. And similar to many of these sub-patterns, shelf resistance is often located right along the top of the center retracement pivot. This illustrates that the most important focal point subsequent to any suspected double bottom is the relationship between this center pivot and current price.

Less common than the A&E is its cousin, the Eve and Adam pattern. Price first develops support near its low on relatively minor volume in the signature rounded Eve curve. The market attempts a rally, which then fails at common retracement levels. Fear ignites the crowd and price action shifts into a higher volatility state. A sharp and violent drop ensues, hurling the stock back toward its lows. A high volume Adam reversal-spike then prints, often with a price extreme just below Eve's bottom. The subsequent uptrend can skyrocket as the crowd sentiment shifts sharply back toward the positive.

Since DBs occur in downtrends, risk must be managed defensively. The greedy eye wants to believe bottoms and easily fools better judgement. Even spectacular reversals offer little profit if price can't ascend back out of the hole it found itself in. When choosing stop and exit points, violation of a prior low is the natural first choice. Make certain your entry permits you to exit for an acceptable loss at this location. And don't stick around long. Price will gather downside momentum quickly at broken lows as it searches for new support.

Successful bottom entry also takes a strong stomach. Even when all the technicals line up, sentiment will be highly negative at these turning points. The potential for short-term profit, though, is outstanding. In addition to other longs ready to speculate on a good upside move, high short interest will fuel explosive impulses off these points. Perhaps for this reason alone, serious traders can't ignore double bottom patterns.

 


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