The coronavirus stock market crash in late February and March 2020 paved the way for a significant new rally, resulting in some big price gains among the best growth stocks. Top chip stock Inphi (IPHI) passed a right buy point in a double bottom at the start of a new high in the stock market, resulting in a massive gain in about four months.
The double bottom is one of the bullish patterns that top stocks tend to experience before they make outstanding runs. Found using stock charts, double bottoms are among the cup-like chart patterns to handle and a flat bottom that investors should be looking for.
A double bottom can be identified by its W-shaped formation. In a true double bottom, the low of the second bottom will be below the low of the first, shaking the weakest investors. A correct double bottom buy point is 10 cents above the middle peak of the pattern.
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Double bottoms form over a minimum of seven weeks. Other requirements include a prior increase in the stock price. The reduction in the total base is usually 20% to 30%. However, heavily loaded markets can lead to deeper double bottoms – like the coronavirus stock market crash.
Sometimes you will see a handle form on the double bottom. It may present an additional buying point.
Inphi Double Medal
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 base, according to MarketSmith chart analysis. Growth stocks usually correct at least twice the general market, so a 40% decline was not unusual.
During the first leg down, the stock bottomed out at 69.07 on February 28, 2020 (1). After a brief rebound, the stock fell back through the 200-day long-term moving average, and eventually came out at 55.72 on March 23. (2). Remember, the second low must undercut the first low to create a proper double bottom.
On April 6, Inphi was one of the first stocks to break out above a new buy point, following the April 2 follow-up. On the separate day, Inphi stock surged past a buy point of 84.57 (3), rising more than 9% and ending the session in a buy zone that topped out at 88.80. The problem was a lack of massive volume on the breakout; heavy volume did not appear until days later.
But a surging line of relative strength (4) offered a sign of immense strength. During the next few sessions, shares expanded rapidly.
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 August 4 as a result of the company’s strong earnings results.
The Santa Clara, California-based company earned an adjusted 95 cents a share on sales of $175.3 million in the quarter ended in June.
This article was originally published on August 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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