... For the sake of argument, let's look at a double bottom and apply the analysis to today's situation. By analyzing a prior double bottom, we can identify the requirements for a confirmed double bottom. This will give us an idea of what to look for in the coming days.
Chart 3 shows a double bottom in the S&P 500 in June–July 2006. After a sharp decline in May–June, the S&P 500 found support around 1220 to start the double bottom process. I have identified five critical points. First, the index established a reaction low in mid June. Second, there was a support test in mid July. Third, the index surged off support with a big move. Fourth, there was follow-through after this surge. Fifth, the index broke resistance around 1280 to fully confirm the double bottom. You can also see that the index broke above the 50-day and 200-day moving averages. Perhaps more importantly, the 200-day moving average never turned down and continued to rise in June and July. This last point could be critical.
Chart 3 shows a double bottom in the S&P 500 in June–July 2006. After a sharp decline in May–June, the S&P 500 found support around 1220 to start the double bottom process. I have identified five critical points. First, the index established a reaction low in mid June. Second, there was a support test in mid July. Third, the index surged off support with a big move. Fourth, there was follow-through after this surge. Fifth, the index broke resistance around 1280 to fully confirm the double bottom. You can also see that the index broke above the 50-day and 200-day moving averages. Perhaps more importantly, the 200-day moving average never turned down and continued to rise in June and July. This last point could be critical.
A DOUBLE BOTTOM NOW?... Now let's look at the current S&P 500 chart for comparison (Chart 4). First, the index bounced in January to forge the initial low. Second, there was a support test in early March. Third, there was a surge off support. That leaves steps four and five left in the process. One big surge, while impressive, is not enough to reverse a 4–5 month downtrend. Follow through (step four) is required to validate this initial euphoria. With key resistance set at 1400, the sixth step requires a break above this level. Such a move would also break the 50-day moving average.
Chart 4
It is also noteworthy that the 200-day moving average is currently falling. In contrast, the 200-day moving average was still rising in July 2006. This means the index is in worse shape now than it was in July 2006. With that in mind, the odds of a successful double bottom here are reduced.
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