Diamond Bottom

The Diamond Bottom is the bullish mirror image of the diamond top. It usually appears after extended downtrends and signals accumulation before reversal. Characteristics include:

• Broadening phase: Price makes lower lows and higher highs, expanding the range.
• Contracting phase: Swings narrow, with higher lows and lower highs.
• Diamond outline: Combined, the swings resemble a diamond.
• Breakout: Confirmation comes when price closes above the top boundary on strong volume.

Diamond bottoms are rarer than diamond tops but can mark powerful reversals.

The diamond bottom captures a capitulation-to-accumulation transition:

• Broadening phase: After a sharp downtrend, volatility expands as panic selling collides with bargain hunting. Swings grow wider as uncertainty dominates.
• Contracting phase: As panic fades, sellers become less aggressive. Buyers step in earlier, creating higher lows.
• Breakout: Once resistance breaks, it signals demand has absorbed supply. Shorts cover, and sidelined buyers rush in, fueling a reversal.

The psychology is one of emotional chaos giving way to stabilization, then reversal.

Bulkowski’s data on diamond bottoms:

• Upward break frequency: ~73%.
• Failure rate: ~9%.
• Average rise after breakout: ~35%.
• Throwback frequency: ~58%.
• Target met rate: ~67%.

This makes the diamond bottom more reliable than its top counterpart, though it is rarer.

Entry:

• Conservative: Buy when price closes above the diamond’s resistance.
• Aggressive: Enter during contracting phase as higher lows form.

Stop loss: Below the last swing low inside the diamond.

Targets: Minimum = height of diamond projected upward. Secondary = nearby resistance zones.

Invalidation: A breakdown below the bottom boundary negates the setup.

• Low volume: Breakouts without volume often fail.
• Misidentification: Many ranges look diamond-like but lack the true expanding-then-contracting structure.
• False breakouts: A brief push above resistance may reverse if not volume-supported.
• Extended duration: Diamonds take time; rushing to label short-term swings is risky.
• Context: Best results after prolonged declines when sentiment is bearish.

• If volume doesn’t contract during narrowing phase.
• If the “diamond” is lopsided (one phase dominates).
• If broader market remains heavily bearish, suppressing reversals.
• If breakout occurs without volume expansion.