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The Double-Bottom Base First Starts Out As A Cup

Sometimes a stock will appear to be forming a cup base, but then the pattern will just fall apart.

Before kicking the stock off your watch list, leave it in there a little longer. It may be forming a double-bottom base instead.

Like the introduced in Tuesday's column, the is one of the more common winning patterns that investors are likely to find.

This is a roller coaster pattern that can lead to big gains. Past market winners such as Cisco Systems (CSCO), eBay (EBAY) and data-storage king EMC (EMC) all cleared double-bottom bases at one time or another en route to huge gains.

The double-bottom base needs at least seven weeks to form. Remember to generally start counting on the first down week. Although rare, some double bottoms can be as long as a year.

Typically, the correction in a double-bottom pattern should be no more than 35% in a market uptrend, like the cup with . But in bear markets, the correction in a double-bottom pattern can be as deep as 50%.

Each in the methodology has a certain look. For the double-bottom, it's defined by the W shape with two lows.

The second low should undercut the first, creating a to scare off the weak holders.

The middle peak of the double bottom should be lower than the left-side high. If the middle peak is higher, you don't have a double-bottom base.

For the double bottom, you don't have to wait until the stock clears the left-side high to buy. The is 10 cents above the middle peak. A double bottom will sometimes form a handle, giving a lower entry point.

MDC Holdings (MDC) had a great run last year, as the housing market rebounded. The homebuilder was a turnaround; it lost money from 2007 to 2011, but was expected to turn a profit for 2012.

The stock formed an eight-week double-bottom base with a 30.05 buy point last year. MDC's middle peak was below its left-side high (1) and the second low undercut the first (2), making it a proper pattern.

MDC cleared the base in the week ended June 29 in heavier weekly trade. was soft on its day of June 26, but came in the next day. The stock jumped 40% by September before settling into a new pattern.