What is the rounding bottom pattern? Although this pattern has a high success rate, it’s relatively rare. In its 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 Is a Rounding Bottom Pattern?
Like a roller coaster, stocks go up and down in price daily. We rarely see them soaring; they need time to pause and digest, and that’s exactly what this pattern does.
A rounding bottom regarding stock charts indicates a positive market reversal. In other words, investor expectations and momentum (i.e., sentiment) gradually shift 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.
We see rounding bottoms at the end of extended downward trends. As I mentioned above, they signify a reversal in long-term price movements.
The pause and reversal sometimes take eight to twelve weeks, depending on market conditions.
Rounded bottom pattern on $SBUX weekly chart.
Basics
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 pattern is a continuation pattern, and the rounding bottom pattern is a reversal pattern.
Similarly, other chart patterns are first cousins to the rounding bottom, such as the saucer bottom and half-pipe bottom pattern.
Rounding Bottom Pattern Psychology
- Initial declining slope
- Indicates an excess supply
- Heavy selling volume
- This excess forces the stock price down
Rounded Bottom Pattern Trading Strategy
- 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 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.
Flat Base
- Pause
- Volume decreases
- Consolidation (predominantly flat over several months)
Bottom Rounds
- Volume increases as buyers enter the market at a low price
- It begins to make higher lows and finally higher highs
- Powerful rally
- Upward trend occurs
- Demand for the stock increases
Pattern Completes
- Bullish push higher
- The stock breaks out
- Upward trend continues
Rounding Bottom Example
You can spot rounded bottoms on all time frames. Above, we show a daily chart of $AAPL, which rounded out a bottom, broke out, and back-tested the red neckline. The chart platform is TrendSpider.
Identification Guidelines
- The price gradually switches from bearish to bullish.
- Concentrate on the weekly chart, as rounding bottoms can be difficult to spot 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.
Important to Remember
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.
Put the volume indicator on your chart and draw a line to connect the tops of 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, called the “neckline,” where the price breaks the resistance level.
Final Thoughts on Rounding Bottom Patterns
The rounding bottom pattern is a technical setup for the patient trader. Identifying stock chart patterns is a powerful asset for any trader. You can profit from breakouts and reversals by learning to recognize patterns early on in trading. I firmly believe that, combined with the proper technical analysis, you can become a better trader.
