Triple Bottom

The triple bottom consists of three valleys "VVV" that are roughly at the same price level creating an area of support as well as two peaks "AA"that create an area of overhead resistance. Price enters the triple bottom formation from above and exits the formation above by breaking up through overhead resistance.

Psychology of Triple Bottom

The psychology of the triple bottom pattern is given next: The triple bottom occurs during a downtrend. Prices fall creating a new low (left valley of triple bottom) and then rise creating a lower high (left peak of triple bottom). Thus far the chart is exhibiting a solid downtrend (lower lows and lower highs). Bears probably saw the left peak as another shorting opportunity because prices fell yet again. However, this middle valley failed to create much of a lower low. Prices rise once again and then fall back down creating the right peak. However, on the right valley, prices fail to fall below the previous two valley prices. The support line created by the lows of the previous two valleys stands and signifies a large hurdle that bears will have to overcome. Thereafter, a decision has to be made after prices rise to the hypothetical third peak – will bulls attempt to push prices higher and break overhead resistance and reverse the downtrend prior to the triple bottom or will bears try yet another time to continue the downtrend? Once resistance is pierced through, the decision has been made and after a very typical retracement back down to the area of prior resistance, prices are expected to move higher.

Buy Signal and Average Max Breakout Gain of Triple Bottom

A buy signal is given when prices break above the resistance line after the third and final valley "VV V". Chart research completed by Bulkowski (2005) explains that the averaged maximum rise after the buy signal is given is 37%; however, pullbacks after the buy signal has been triggered back to the prior resistance line are plentiful at about 64% of the time; in addition, he warns that triple bottoms that occur after a long uptrend in the past have shown poor performance. The market technicians, Kirkpatrick & Dahlquist, state that a triple bottom with a slightly higher second peak is more favorable (2010, p. 313).

Triple Bottom Price Target

Typically, classical technical analysts project a price target by taking the height of the pattern (in this case the peak minus the valley) and add that to the breakout signal price (in this case, the resistance line price). However, Bulkowski (2008) offers a more specific formula for the triple bottom target price:

Triple Bottom Chart Example

The chart above of Procter & Gamble (PG) shows a triple bottom chart formation. After a couple month downtrend, the price reverses on a spike (creating the left valley). The left peak of the triple bottom actually is tested three different times before prices move downward and create the middle valley. Prices rise again creating the right peak at the same price level as the left peak. Prices fall once again to the level of support established by the prior left and middle valley prices. The support line holds. Prices rise again to the area of resistance established by the previous two peaks. Once a long price bar penetrates and closes beyond the resistance line, a buy signal is generated. But as is common with this triple bottom pattern, a retracement back to the prior resistance line occurs. However, afterward, prices move quickly back higher to complete the successful triple bottom pattern.

Works Referenced

1. Kirkpatrick II, C.D., & Dahlquist, J.R. (2010). Technical Analysis: The Complete Resource for Financial Market Technicians (2nd ed.). Upper Saddle River, NJ: FT Press.
2. Rockefeller, B. (2011). Technical Analysis For Dummies (2nd ed.). Hoboken: John Wiley & Sons.
3. The Pattern Site. (2008). Bulkowski's Measure Rule. Retrieved June 1, 2012, from http://thepatternsite.com/measure.html
4. The Pattern Site. (2005). Bulkowski's Triple Bottoms . Retrieved June 1, 2012, from http://thepatternsite.com/tb.html