The Big W
Double Bottoms provide visual reference points
that map the entire reversal process. Once located, these signposts
identify most key price pivots and flash early warning signals when violated.
The most common of these, The Big W, begins at the last major high printed
by a downtrending stock, just prior to the first bottom. The first bounce
after this low creates the center of the W as it retraces between 38% and
62% of that last downward move.
This rally fades and price descends back toward
a test of the last bottom low. At this moment the trader listens
closely for the first bell to ring. A wide range reversal bar (doji or
hammer) may appear close to the low price of the last bottom. Or volume
spikes sharply but price does not fail. Better yet, a Turtle Reversal develops
where price violates the last low by a few ticks and then prints a sharp
move back above support. Should any or all of these events occur, we mark
the potential second leg on our Big W.
Trade entry can be initiated aggressively near
the bottom of the second leg if the bells ring loudly. The top
of the shorter move marking the partial retracement of the last downward
impulse (middle of the W) now becomes our main pivot price for analysis
and further trade entry. For price to successfully return to this point,
it must retrace 100% of the last fall (from the second low). This finally
breaks the lower high, lower low bear cycle. In strong DBs, price will
quickly surge to this price right off the second bottom.
A less aggressive long position can be entered
when this new impulse retraces strongly through 62% of the fall into the
second low. However, if a short-term exit is desired, sufficient
profit potential must exist between the entry and the pivot price for this
trade to make sense. Longer-term traders can hold positions as price mounts
this pivot. At this point, it will often pause to test support. However,
another upward leg is then expected.
Price returning to the height of the middle
of the Big W has a very high probability of surging beyond this point.
Under normal conditions, it can easily retrace 100% of the original downward
impulse, completing both the DB and Big W patterns. This tendency allows
for further entry at the expected return test to the pivot point after
the second surge has begun. The TIG chart provides an excellent example
of this second chance opportunity.
|In 1996, property-casualty carrier TIG Holdings
charted a double bottom volatility ride uncommon in insurance stocks. As
price emerged from a small but powerful Turtle Reversal, it faithfully
completed a classic double bottom variation: the outline of the letter