Bottom Pattern

As the name implies, "V-Bottom" patterns resemble a "V" shape. "V-Bottoms" are formed after a steep decline followed by a rally to reach the top of the pattern. "V-bottom" patterns form quite often and are not always easy to detect until part of the formation is complete. "V-bottom" patterns usually have a single day of spike run-down or exhaustion sell-offs before the rally begins.

"V-bottoms" usually produce high volume on the "spike" or "exhaustion" day followed by even higher volume on the following days. Daily prices usually do not attempt to close near the "low" of the thrust days to signal a potential reversal pattern.

A trend line is drawn connecting the previous "swing highs" in the "V-bottom" pattern. A "confirmation" is signaled when the price closes above the trend line.

Trade: Wait for a confirmation above the trend line. Enter a "long" trade above the high of the breakout bar.

Stop: "V-bottom" failure can occur when prices close below the low of the "V-bottom" pattern.

Target: "V-bottom" patterns usually return to the prices at the top before another descent. Set targets near the "top" of the pattern.

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Trading V-Bottom Pattern

Trading V-Bottom Pattern

The example above illustrates a "V-bottom" pattern formation from Microsoft's daily chart. In August 2006, Microsoft made a high of $27.75 and retraced to $24 by October 2006. In anticipation of its Vista release, Microsoft rallied from October, 2006 to November2006 making a "V-bottom" pattern. A trend line is drawn in the above chart connecting the previous "swing high" and "V-bottom."

1. Enter a "long" trade above the high of the trend line breakout bar.

2. Place a "stop" order below the pattern low or "swing low."

3. Target the previous "swing high" prior to the "V-bottom."

Trading V-Bottom Pattern

Trading V-Bottom Pattern

The example above illustrates a "V-bottom" pattern from the NASDAQ Futures (NQ) weekly chart. From April 2006 to June 2006, NQ fell sharply and closed below 1500. In July 2006, NQ reversed and started to climb up. A trend line is drawn in the above chart connecting the "swing highs" to position the "long" trade. A close above the trendline signals the trend reversal and a "long" trade.

1. Enter a "long" trade above the high of the trend line breakout bar.

2. Place a "stop" order below the "V-bottom" pattern's low.

3. Target the previous "swing high" prior to the "V-bottom" pattern.

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