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Double-Bottom Base Can Launch Strong Rally.(A)
By David Saito-Chung
Investor's Business Daily
If you're a prudent investor, the long wait for the market bottom drags on. But when it turns, how will you find the best stocks?
Top growth investors go through a three-step process. First, spot the hot industries in the market. Next, find the industry leaders in terms of profit and sales growth, the level of institutional buying and other factors. IBD's Industry Groups page and proprietary stock ratings can aid your research.
The third step is just as crucial as the first two: Home in on stocks that break out of well-formed chart patterns at or near new highs. In every bull market, such stocks have delivered the richest gains. One key pattern is the "double bottom."
This base is exactly what it sounds like. After a stock makes a nice run, itfalls anywhere from 20% to more than 50% off its high. The stock eventually hits a bottom and rallies for a while. But instead of resurfacing at its high, it sinks again.
This second decline is vital for the stock's future long-term advance. It shakes out shareholders who lack conviction. But others recognize the company'svalue and buy, so a second bottom forms. It can be slightly above or, better yet, below its first low.
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