For immediate release
Chicago, IL – November 1, 2023 – Today’s Zacks Investment Ideas feature highlights Nvidia NVDA and Arista Networks ANET.
Double Bottom: Harness the power of this explosive base
Study the past to benefit the future
“Throughout time, people have basically acted and reacted the same way in the market as a result of greed, fear, ignorance and hope. This is why numerical formations and patterns are constantly repeated. Again and again, with slight variations. Because markets are run by people and human nature never changes.” ~ Jesse Livermore
Even though the legendary investor Jesse Livermore was around a century ago, his advice still rings true today and is as fresh as ever. Investors cannot predict the future. However, by studying the past, investors can recognize patterns that tend to repeat themselves in the stock market and use them to gain an advantage. Like a casino operator, a slight advantage played out in a series of trades can lead to big results.
The double bottom model: explosive assembly
In technical analysis, a double bottom base structure is a bullish chart pattern. The pattern resembles the letter “W” and is characterized by two distinct dips at approximately the same price level, separated by a peak between them. Traders often look for this pattern because it signifies a period when selling pressure has subsided and buyers are gradually gaining control of the market. Confirmation of a double bottom pattern occurs when the stock price breaks above the peak that separates the two bottoms.
A good precedent for investors to study is the double bottom pattern that occurred with the chip leader Nvidia. In February 2016, Nvidia broke out of the double-bottom base structure after posting earnings. Over the next year, the stock never looked back and gained a mind-boggling 400%.
Of course, not all double bottoms are created equal. Below are the main features to look for in a double bottom:
Strong uptrend before base structure: Stocks tend to exit bases in the same direction they entered. In other words, make sure the stock is in an uptrend before it forms a base. Remember, the trend is your friend.
Shaking: A subtle but vital clue to look for in a double bottom foundation is an undercutting of the first trough on top of the second trough. By breaking the first trough, the stock shakes off the “weak hands”.
Gap Up on Huge Volume:A recurring theme in the biggest double bottom winners is the gap to the upside (often driven by profits) on high volume. The gaps indicate that demand has returned to the stock. When NVDA lagged in our 2016 example, volume rose to 187% above its 50-day average.
A strong industry group: As with any stock, a strong industry group can be a significant headwind. In 2016, semiconductors were the strongest industrial group.
Steady revenue growth: After all, fundamentals drive stocks. Stocks with the best returns from double-bottom bases had earnings growth of 40% or more on a year-over-year basis.
Arista Networks: Nvidia 2.0?
Tuesday, shares of a provider of cloud networking solutions Arista Networks broke out of the double-bottom base structure and rose ~13% vol four times over normal.
Arista checks all the boxes for a potential mega-winner and has a strong uptrend, a shakeout below the first bottom, and a big gap in volume. Arista is part of the hot database industry that’s benefiting from the AI revolution, and revenue is growing a whopping 46% year over year.
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