A double bottom marks a significant reversal in market direction. There are two possibilities:
–after a bear market, meaning a nine-month to year+-long market decline caused by a recession. (This is not the situation we’re in now.) The market typically bottoms six months or so in advance of what government statistics will eventually say was the low point for the economy. It does so partly on valuation, partly because the first anecdotal signs that the worst is over are beginning to be seen.
The market then begins its typical sawtooth pattern of upward movement, forming what technicians call a channel. This is an upward sloping corridor whose ceiling is formed by progressive market highs and whose floor is similarly formed by progressive lows. Initially, the slope can be quite steep. Day to day, the market makes progress by bouncing along between floor and ceiling.
–after a correction, meaning a decline of, say, 5% to 10% in market value that occurs over several weeks and which, in effect, adjust market values back from stretched to the upside to levels where potential buyers see the potential for reasonable gains over a twelve month period. (This is our current situation, in my view.)
Generally speaking, the same upward channel forms. But the slope may be very shallow. In fact, until new, positive, economic information emerges, there may not be much of a slope at all, so that stocks move more sideways than up. Nevertheless, in the case that the channel is almost completely horizontal, periodic successful testing of the bottom established at the end of the correction reinforces the idea that downside risk is limited.