How To Invest In The Stock Market: A Double Bottom Leads to Big Gains For Inphi

The coronavirus stock market crash in late February and March of 2020 paved the way for a new significant uptrend, resulting in a number of big price gains among top growth stocks. Top chip stock Inphi (IPHI) surged past a correct buy point in a double-bottom base at the start of the new stock market uptrend, leading to a huge gain in about four months.


How To Invest: Spot A Double Bottom

The double-bottom base is one of the bullish patterns commonly formed by top stocks before they make outstanding runs. Found by using stock charts, a double bottom is among the chart patterns like the cup with handle and flat base that investors should be in the hunt for.

A double bottom can be identified by its W-shaped formation. In a proper double bottom, the low of the second bottom will undercut the low of the first, shaking out the weaker investors. A double bottom’s correct buy point is 10 cents above the middle peak of the pattern.

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Double-bottom bases form over a minimum of seven weeks. Other requirements include a prior uptrend in the stock’s price. The decline in the entire base is typically 20% to 30%. However, severe bear markets — like the coronavirus stock market crash — can lead to deeper double bottoms.

Sometimes you’ll see a handle form on the double bottom. It can present an additional buy point.

Inphi’s Double Bottom Base

During the coronavirus bear market, the Nasdaq fell as much as 33% from its 52-week high. During that same time period, Inphi corrected 40% as it formed an eight-week double-bottom base, according to MarketSmith chart analysis. Growth stocks will typically correct at least two times the general market, so a 40% decline was nothing unusual.

During the first leg down, the stock price bottomed at 69.07 on Feb. 28, 2020 (1). After a brief rebound, the stock plunged back through its long-term 200-day moving average, eventually bottoming out at 55.72 on March 23 (2). Remember, the second low needs to undercut the first low to create a proper double bottom.

On April 6, Inphi was one of the first stocks to break out past a new buy point, following the April 2 follow-through day. On the breakout day, Inphi stock soared past an 84.57 buy point (3), rising more than 9% and ending the session in a buy zone that topped out at 88.80. A problem was a lack of huge volume on the breakout; heavy volume didn’t appear until days later.

But a surging relative strength line (4) offered a sign of tremendous strength. Over the next few sessions, shares quickly became extended.

After two successful tests of the 10-week moving average support level, Inphi stock rallied as much as 67.9% from the buy point through Aug. 4 in the wake of the company’s strong earnings results.

The Santa Clara, Calif.-based company earned an adjusted 95 cents a share on sales of $175.3 million in the June-ended quarter.

This article was originally published Aug. 12, 2020, and has been updated. Follow Scott Lehtonen on Twitter at @IBD_SLehtonen for more on growth stocks and the stock market.


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