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Jagged Action In Indexes Is Soil For Double Bottom

Wealth-Making Patterns: Third In A Series Baseball star Ted Williams noted in "The Science of Hitting" that the top hitters "work from a frame of reference, you learn what you might expect in certain instances.

Exceptional investors do the same. They learn what to expect in certain kinds of markets.

Take a look at the chart above. It's a weekly chart of the Nasdaq in 2010 and 2011. Pay attention to the action through August 2010. It shows a jagged decline.

What would you expect from such a market when a new uptrend is confirmed

If you said you'd expect this market to create a fair number of double-bottom bases, you'd be right. The jagged action in the Nasdaq shared the general shape of a double-bottom pattern (1).

That doesn't mean that some stocks didn't form cups or flat bases during this period. But a smooth cup or tight had some choppy head winds to fight to complete its shape well.

The double-bottom base didn't have that problem. The market was helping the conform to its classic form.

The double-bottom base involves a W shape, with the second low undercutting the first low and a middle peak in the upper half of the pattern. The is the middle peak plus 10 cents, unless a is formed.

After the spring and summer market of 2010 was through with its jagged ways, a follow-through day came on Sept. 1 (2).

Savvy investors were looking at the uptrend with a "frame of reference." They expected double-bottoms. And they were ready to jump on them.

Panera Bread (PNRA) cleared an 85.23 buy point in a double-bottom base in the week-ended Sept. 3, 2010 (3). The restaurant's shares advanced 25% in about three months.

Ulta Beauty (ULTA) broke out of a double bottom the same week, jumping over a 25.99 buy point. The specialty retailer gained 43% in three months. Apple (AAPL) popped above a 266.09 buy point in a double bottom the week ended Sept. 17 (4). It notched a 37% gain in five months. Lululemon (LULU) broke out the same week as Apple. After clearing a 43.47 buy point in a double bottom, the apparel retailer rose 96% in less than five months.