What is the rounding bottom pattern? Although this pattern has a high success rate, it’s relatively rare. But when it comes, you’ll want to be ready for it. This highly reliable bullish reversal pattern is one you can’t afford to forget.
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What Is a Rounding Bottom Pattern?
- For those of you wondering, I am not referring to your backside. However, I am starting this new Brazilian bubble butt workout that promises a rounded bottom in one week. I have my doubts, but I’ll keep you posted. Anyways, I digress. In it’s simplest form, a rounded bottom, or saucer chart pattern is just that – a chart that forms a rounded bottom. Many refer to it as a U shape.
What Does a Round Bottom Chart Pattern Signify?
Just like a roller coaster, stocks go up and down in price every day. We rarely see them soaring; they need time to pause and digest, and that’s exactly what this pattern does.
A rounding bottom when it comes to stock charts indicates a positive market reversal. To put it in another way, investor expectations and momentum (i.e. sentiment), is gradually shifting from bearish to bullish.
Often, it’s more of a pausing pattern, allowing the stock to consolidate before it builds enough energy to move up in price.
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When Do You See a Rounding Bottom Pattern?
We see rounding bottoms at the end of extended downward trends. Like I mentioned above, they signify a reversal in long-term price movements.
Sometimes the pause and reversal takes time, even eight to twelve weeks, depending on market conditions.
Rounded bottom pattern on $SBUX weekly chart.
Is a Rounding Bottom Pattern the Same as a Cup and Handle?
No.
Visually, a rounding bottom looks like the cup and handle pattern, but doesn’t have the temporary downward trend of the “handle” portion. Remember, the C&P patterns is a continuation pattern whole the rounding bottom pattern is a reversal pattern.
Similarly, there are other chart patterns that are first cousins to the rounding bottom, such as the saucer bottom and half-pipe bottom pattern.
Flat Base
- Pause
- Volume decreases
- Consolidation (predominantly flat over several months)
Bottom Rounds
- Volume increases as buyers enter the market at a low price
- Begins to make higher lows and finally higher highs
- Powerful rally
- Upward trend occurs
- Demand for the stock increases
Rounding Bottom Completes
- Bullish push higher
- The stock breaks out
- Upward trend continues
You can spot rounded bottoms on all time frames, above we are showing a daily chart of $AAPL which rounded out a bottom, broke out, and back-tested the red neckline. Chart platform is TrendSpider.
Rounding Bottom Identification Guidelines
- The price gradually switches from bearish to bullish.
- Concentrate on the weekly chart as rounding bottoms can be difficult to spot on the daily.
- Price trends upward to the pattern 66% of the time (that is, 66% act as continuation patterns).
- Look for a rounded bowl shape, usually over many months and often after an upward price trend.
What I Want You to Remember
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Above all, to be sure it’s a rounding bottom breakout, you must have an influx of substantial volume. Generally speaking, the trading volume in a rounding bottom chart pattern ideally follows (and confirms) the direction of the stock price.
You must have volume confirmation because volume confirms the price action.
I suggest you put the volume indicator on your chart and draw a line to connect the tops for each price frame. As can be seen, the volume will also mirror the same rounding pattern. In the long run, this is a straightforward method to validate the pattern visually.
Your Entry Point
Your entry point is the top of the U or also referred to as the “neckline,” where price breaks the resistance level.
The 4 Steps Required to Trade the Rounding Bottom Pattern
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- Confirm The Rounded Bottom by finding a price decrease, that slowly switches to a range followed by a price increase. Your strongest confirmation shows high volumes on the decline, flat volumes on the range and increasing volumes on the reversal.
- Draw The Neckline by drawing a horizontal line across the top of the bearish and bullish sides of the rounding bottom pattern.
- Verify Rounded Bottom Breakout. This happens when the price penetrates the neckline in a bullish direction. Furthermore, the stock should show strength in the form of price expansion and volume increase as it breaks through this neckline.
- Enter Long At Break Of Neckline: Self-explanatory
- Exit At Your Profit or Stop Loss Target. I do not believe in trading without a stop loss, nor should you.
- Put your stop loss at the midpoint of the pattern or your designated risk: reward ratio.
- Your minimum profit target for the pattern is equal to the size of the pattern when added to the breakout
Final Thoughts
Without a doubt, the rounding bottom pattern is a technical setup for the patient trader. Likewise, being able to identify stock chart patterns is a powerful asset for any trader.
Given these points, by learning to recognize patterns early on in trading, you can make profits from both breakouts and reversals. I’m a firm believer that combined with the proper technical analysis you will be successful. Let Bullish Bears show you how!
