Technical analysis can be a fickle beast. But then, so can fundamental analysis, too. In the end, there's no perfect way to identify a stock that's about to soar into the stratosphere or plummet to new lows. However, there are certain patterns and strategies that emerge over time that have historically indicated certain types of movement more often than not. One such pattern is the double bottom.
The double bottom refers to a stock that drops to a support level, recovers, drops again, but then makes another recovery at about the same support level that it fell to the last time. The stock's performance makes a shape like a W, essentially. Or at least, that's what you're hoping when you grab the stock after the second bottom. Sometimes, instead of a W, it's really a lightning bolt pointing down and you lose a lot of money.
While it's certainly no guarantee, there's plenty of reason to pay attention to a stock that's hit a double bottom. For one, the fact that it rebounded at approximately the same support level could indicate that the market views the stock as having at least a certain value. So when it reaches that level, people start buying shares again, viewing them as a bargain, and the price comes back up. The effect could also be bolstered by the sense investors could then take that they know what the floor is for the value of that stock. This is, of course, a relative mirage because no stock is ever more than a terrible earnings report or a CEO embezzlement scandal away from crashing through its support level (like the afore-mentioned, downward-pointing lightning bolt), but double bottoms can still be pretty compelling evidence that a stock's at least going to stay at or above a certain price.
And, of course, it doesn't hurt that everyone and their mother on Wall Street knows all about double bottoms. As such, it can almost become a self-fulfilling prophesy as stocks coming off a double bottom become more appealing to traders and technical analysts, who, in turn, buy the stock and drive the price up. One way or another, while it's clearly not a guarantee, a double bottom is something to keep an eye on. And if it's paired with other reasons that might make the company an attractive buy for you, all the better.
So, here are four companies not only hit double bottoms in the last few months, but they appear to be fairly attractive value buys otherwise, with price-to-book and price-to-sales ratios under 1.
Schnitzer Steel Industries (SCHN)
Portland, OR-based Schnitzer Steel bottomed out the first time in late April and the second time in early July, and it's jumped just under 18 percent ever since. In the end, the long-term potential for Schnitzer probably has a lot more
Good old Alcoa, classic market bellweather. And, in true fashion, Alcoa appeared to be on the rise after experiencing a double bottom over the last few months, making that perfect W. That is, until it hit a skid on September 19th and lost 4.15 percent over the last seven trading days. Oh well. Once again, like Schnitzer, the price of aluminum is probably the thing to be watching if you're long Alcoa.
Walter Energy (WLT)
Walter Energy is a coal-mining company based out of Birmingham, AL. The double bottom experienced by Walter Energy was not as pronounced as some other, gently landing at support in early July and then again in early August. As such, its rise has also been less pronounced, making the whole W appear very squished in this case.
Monster Worldwide (MWW)
The parent company of the job-search website Monster.com, this New York City-based firm is active in both career-placement services and internet advertising. Monster has seen an extended double bottom, with the first time hitting support coming in mid-April, and the second time in late August. However, the expected bounce has yet to materialize and the stock appears to be hitting a third bottom at the moment. That could mean that the stock's poised to take off. It could also mean that it's floundering and about to break through support. Regardless, Monster is a company with strong fundamentals that could make it an attractive value buy regardless of its technicals, sporting a P/E ratio of 9.62, a forward P/E of 11.67, a PEG of 1.07, a P/S of 0.57, and a P/B of 0.58.
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