I was asked to discuss bottoming patterns.
Bottoming patterns occur on all 3 timeframes:
1. Long Term when a bottom is a major low area. The bottom can take many forms and can last a several months to several years. These patterns are so lengthy that the monthly line chart must be used to see them clearly.
2. Intermediate term a mid-level trend correction bottom. Generally these take several months to complete and are the easiest patterns to see on a weekly chart.
3. Short term time frame which is a correction low within a 1 month to 3-4 month time period.
All time frames can form the commonly known bottom formations:
1. Bowl Shape bottom
2. W bottom
3. V bottom
4. Inverted Head & Shoulders bottom
5. Triple or Quadruple bottom
6. Basing bottom
Long Term bottoms occur after major bear markets for most stocks or for an individual stock after it has undergone serious financial difficulties.
As an example HPQ has undergone a period of financial difficulties that prompted a gapping downside action.
On the daily chart it is hard to tell where the stock is in relation to its long term trend or even if this is an intermediate term or long term correction phase.
Chart 1
We can see the gap downs, and that this very popular stock had periods where it went sideways for a long time, had a minor recovery in late December to early January and then collapsed again with 2 more large gap downs. Currently in this chart it is in a sideways pattern of approximately 2-3 points. This is another attempt at a basing pattern low. Basing patterns are common patterns when a stock is attempting to find the low for the bottom to commence.
Chart 2The weekly chart shows us a great deal more about what is going on and what will occur next. The weekly chart shows that HPQ tried to move beyond the 2007 high in 2010. The 2007 high is a very strong resistance level because it is both a fundamental and technical resistance area. HPQ managed to creep just above it then formed a lopsided M topping formation. On the second side of the M the stock collapses. Then it finds support in March and April of 2010 from the sideways trading range of 2008 but that doesn’t hold for long as financials worsen. The lows of the 2008 again cause another stall in the fall rally of 2010. Resistance this time in January of 2011 is the highs of the 2008 trading range. Then the stock collapses again on bad earnings.
It is currently cradled in the neckline support area of the Head and Shoulders bottom that formed in late 2008-2009. The H&S is a strong support level. The low of the H&S is very strong support.
It will take some new negative news to push through the neckline support areas. Right now HPQ has many positive news events and financials are beginning to turn around.
That means that this support area is likely to hold BUT a bottom has not commenced. All this is a testing area called a baseline.
Here is the monthly chart to get the entire visual of HPQ over the long term trend.
Chart 3Baselines form all the time. This is where a stock tests a strong support level. It is often also a fundamental support level.
Whenever you have a combination of technical AND fundamental support it is a powerful combination.
We will follow the progress of HPQ from time to time. Right now, it has a lot of work to do before it can complete the bottom and resume an uptrend.
Trade wisely,
Martha Stokes, C.M.T.
Member of Market Technicians Association
Master Rated Technical Analyst: Decisions Unlimited, Inc.
Instructor and Developer of TechniTrader® Stock Market Courses
http://technitrader.com
MetaStock Partner
©2011 Decisions Unlimited, Inc.
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