Below is an example of a problematic bottoming pattern to analyze. Let’s try to make things slightly more manageable, and draw the resistance trendline, which connects the price peaks.
Just by definition, an uptrend is higher highs and higher lows. So when we start to see a breakout of a previous high, that could be a good indication of a start of a new bullish bias. But here, where would you choose the lowest high to be? Would it be the mini top in November, or if we step back the August high? Do we consider the November top just part of the original fall starting from the August high? Too many questions!! Or do we say “the heck with it” and take the more conservative approach and have the July high, which was the last touch of the resistance trendline?
Personally, if things are too complicated, technical speaking, then I would toss out this chart altogether. But if you like the company and waiting for an entry point to get in, then you have to make a decision. Well, there are two main factors to decide from: your risk tolerance, and investment capital.
- If we choose the mini top in October, our risk is the distance from the breakout high down to the support level – our investment capital is lower. Still, our risk is more significant, because after all, our reference is a less proven mini top, which is shaky.
- But on the other hand, if we take the May top as our breakout reference, then our risk is lower (because the price has already broken the October and August mini tops), but we have to invest more capital (because the share price has gone up, too).