Friday, June 11, 2010


Per StockCharts, "W-Bottoms were part of Arthur Merrill's work that identified 16 patterns with a basic W shape. Bollinger uses these various W patterns with Bollinger Bands to identify W-Bottoms. A "W-Bottom" forms in a downtrend and involves two reaction lows. In particular, Bollinger looks for W-Bottoms where the second low is lower than the first, but this second low holds above the lower band. There are four steps to confirm a W-Bottom with Bollinger Bands. First, there is a reaction low that forms. This low is usually below the lower band, but it does not have to break the lower band. Second, there is a bounce towards the middle band. Third, there is a new price low in the security, but this low holds above the lower band. The ability to hold above the lower band on the test shows underlying strength. Fourth, the pattern is confirmed with a strong move off the second low and a resistance break."

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