For some stocks, the sell-off has been a bit longer than others. In fact, today there has been relative outperformance among value-oriented names. If the market is to rally in the coming weeks to close 2021, this may be a theme that could readily play out. With that in mind, it’s important to be able to identify reversal patterns, like Diamond Bottoms, that may be signaling a bullish move ahead.
Let’s take a closer look at the Diamond Bottom Pattern.
Rating: 3 Star
Directional Bias: Bullish
Pattern Type: Reversal
Pattern Description:
The Diamond Bottom pattern occurs within the context of a longer downtrend. Initially the pattern begins a broadening formation with higher highs and lower lows, but then begins to narrow with lower highs and higher lows.
Volume Description:
Volume tends to drift downward during the diamond formation and expand on the breakout.
Breakout Confirmation:
A close above the upper trend-line drawn across the downward-sloping highs of the diamond with above average volume.
Measuring Technique:
Measure the widest point of the diamond’s range and add it to the breakout level.
Statistical Notes:
Diamond breakouts nears the 1-year low typically outperform, and throwbacks following the breakout generally hurt performance. The pattern has a low failure rate with decent upside potential but tend to fall-back once the target high is reached. Formations with more range between highs and lows perform better than shorter ranges.
Conclusion
One of the points that adds to consistency of the Diamond pattern is to identify companies that are breaking out near 1-year lows. In our current market climate, this isn’t as hard as it may seem, despite the major market indices being closer to their highs. This is a result of the market returns resting on the shoulders of a handful of companies and sectors. Right now, it appears that the burden may shift to the more oversold companies and this pattern may help identify trend reversal opportunities.
Do you like price patterns and are looking to learn more about them? I have an upcoming class on December 16 for TheoTrade members. We would love you to join us by clicking here!
Wondering when to hedge? See how unlocking the Vomma Zone can help you better understand when volatility is about to rise.
Want to learn more about how to work with me? Check out Trader by Your Side!