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A Double Bottom To Watch

07/30/14 04:18:13 PM
by Koos van der Merwe

When a share rises off a double bottom it is worth a watch.

Security:   TLM
Position:   Accumulate

A double bottom appears as a "W" on a chart. It is a popular formation among analysts, but the pattern can be misinterpreted by many analysts, so care should be taken when such a formation appears. You should only react to a confirmation of a double bottom when the internal "A" of the "W" formation is broken.

Figure 1. Weekly chart of TLM.
Graphic provided by: AdvancedGET.
The chart in Figure 1 is a weekly chart of Talisman Energy (TLM) showing how the share price has fallen from a high of $25.27 in March 2011 to a low of $9.58 by May 2012. The price then rose to $15.27 by September 2012 and then fell to retest the low of $9.64 forming what appears to be a wedge. However, with the horizontal base at $9.64 the pattern is not a wedge but can represent major support for the share price. With the price presently testing the upper band at $11.28, a buy signal could be given should it break above the upper trend line. The rising relative strength (RSI) suggests that this could indeed occur.

Figure 2. Daily chart of TLM showing the possible double bottom formation.
Graphic provided by: AdvancedGET.
The chart in Figure 2 is a daily chart showing the double bottom pattern that has formed. With the rise of the price to a high of $11.23 the pattern could be suggesting that a buy signal may occur in the near future. The closing price however, must be above $11.09 to trigger a buy. With the RSI having given a buy, this is indeed possible. Note that the formation also suggests a head & shoulders pattern, but because this pattern formed after a falling price, its credibility is doubtful.

I would not be a buyer of TLM until the closing price breaks above $11.09. Should this occur, the target for the share price will be $12.43 (11.09-9.75=1.34 + 11.09 = 12.43).

Koos van der Merwe

Has been a technical analyst since 1969, and has worked as a futures and options trader with First Financial Futures in Johannesburg, South Africa.

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