Bottom: What it is, How it Works, Example

What Is Bottom?

A bottom is the lowest price traded or published by a financial security, commodity, or index within a particular referenced time frame. The time frame can be a year, month, or even an intraday period, but when referenced in financial media or studies, this term refers to a significant low point of interest.

Understanding Bottom

A price bottom is referenced for a variety of reasons in financial publications. Typically a relative bottom might serve as anchor to reference returns from that point. Such returns are nearly mythical in nature since investors rarely if ever buy a security at the precise lowest point of trading—the bottom of a price trend for that period.

For example, after the financial crisis of 2008, prices drifted lower for about 10 weeks and put in a price bottom on March 9, 2009. One year later and thereafter, many references were made in financial media publications to gains made measured from that point. Gains from the lowest point traded after a downward trending market correction or full blown bear market based on some kind of crisis or panic can be among the best trading gains in a lifetime, if achieved. For this reason, traders and investors are continually on the lookout for ways to identify a market bottom.

With regards to an individual security, being able to identify a price bottom can help an investor or technical analyst gauge the trading range for a security during a year or months-long period. This can provide guidance for security valuations going forward and inform investing decisions. Being able to buy near the bottom in a given year can substantially improve returns for that year. Technical analysts usually study the entire history of a security’s price movements, short-term trading levels, and a security’s trading volume and look for patterns that identify when the security will put in a relative bottom.

If a stock has bottomed out, it means that it reached its low point and could be in the early stages of an upward trend. Often a bottom can be a signal for a reversal. Investors often see a bottom as an opportunity to purchase a stock when the security is underpriced or trading at its lowest value. In technical analysis, a bottom is identified as the lowest level of support when charting a security.

Example of Bottoms

Most technical analysts use channel trading systems which chart resistance and support levels for a security over time. Two of the most common price channels include Bollinger Band® and Donchian Channels. Trading channels can be helpful in predicting and also detecting a bottom since bottoms usually occur at or near the support levels in a channel charting system. As such, bottoms are also typically a signal for a reversal.

A single bottom followed by a reversal will often form a U-shaped pattern. These patterns may also be called a rising or ascending bottom. This is a trading pattern with a bottom that follows with stair steps that move upward over time. In a rising bottom, the stock gradually begins a bullish trend higher. This pattern is a popular buy signal for many traders.

A double bottom is a price pattern in which a stock drops in price and then rebounds twice during a specific period of time. Say, for example, the price of XYZ common stock drops $5 per share to $20 and then rebounds to $26. Three weeks later, the stock again drops to a price near $20 per share and rebounds again, which creates a stock price chart that looks like the letter W. Most traders are aware of a security’s bottom trading level and are cautious of double bottoms. Securities rebounding from bottom levels may return to the bottom price level several times.