Rounding Bottom Chart Pattern
The rounding bottom pattern, also known as the "saucer" or "bowl" is a longer term pattern that is usually identified using a weekly chart. Typically (62% of the time), there is an uptrend prior to the rounding bottom (Bulkowski, 2005). Prices then begin to fall, followed by a shallow bottoming process, and then prices begin rising at a steeper grade creating the visual appearance of a bowl or the letter "U". The left side of the bowl where the pattern begins is called the "left lip" and the right side of the bowl is called the "right lip". Usually prices hit the right lip at approximately the same price level as the left lip and begin trending sideways or retracing downward to create an area of consolidation. According to Bulkowski (2005), a buy signal is triggered when prices close above the resistance line drawn from the left lip to the area of consolidation formed after the right lip; or if there is no right lip, then the price level of the left lip is used as the resistance line.
Rounding Bottom Breakout Average Maximum Gain
The average gain for a rounding bottom pattern breakout to the upside before any 20% correction is approximately 43% (Bulkowski, 2005). Kirkpatrick & Dahlquist (2010) state that rounded bottoms are more common than rounded tops (p. 326).
Rounding Top Chart Pattern
Rounding tops look visually opposite to rounding bottoms. Price before the pattern is an uptrend where prices increase and then gradually slow down their ascent to a point where prices are moving horizontally; prices then begin to move downward and increase the downward slope over time eventually creating a dome or an inverted letter "U". Prices typically end their descent at the right lip of the rounding top at approximately the same price level as the left lip.
Rounding Top with Upside Breakout
The rounding top can breakout in two directions.
Rounding Top Breakout Downward Average Maximum Decline
The downward breakout which occurs 47% of the time happens when prices penetrate below the right lip support area; the upward breakout which occurs 53% of the time happens when prices rise after the right lip and penetrate above the highest high in the rounded top pattern; the rounding top has an average gain for an upside breakout of 37% and a downside breakout of 19% (Bulkowski, 2005).
Rounding Top Breakout Upward Average Maximum Gain
Historically, price targets were calculated by measuring the height of the pattern and adding or subtracting that from the breakout price; however, Bulkowski (2005) has created price targets for the rounding top and rounding bottom that his research shows are more accurate. These price targets are given next:
Traits that Increase the Historical Effectivenes of the Rounding Top and Bottom Patterns
Some traits that increase the historical effectiveness of the rounding top and bottom is given next:
- Taller patterns perform better
- Rounding bottoms within a third of the yearly high perform best
- Rounding tops perform better with higher breakout volume
- Rounding tops with breakouts that are gaps have larger price moves
- Rounding tops within a third of the yearly low perform best
Rounding Bottom Breakout to Upside Chart Example
The chart above of the Mid-Cap 400 ETF (MDY) shows a rounding bottom pattern on a weekly chart. As is most typical, the rounding pattern occurs after an uptrend. A high is created in the uptrend, which will eventually become the left lip of the bowl. Prices fall downward, then flatten out, and then climb upward. With the rounding bottom pattern, very often prices stop their ascent at the same price as the left lip and then flatten out and consolidate sideways or retrace slightly downward. Once prices break and close above the resistance line drawn from the left lip to the right lip, then a buy signal is triggered. In this chart, the buy signal was triggered, but four days later prices fell back to the price level of the resistance line; this is called a pullback and according to Bulkowski (2005) this occurs 40% of the time. After the pullback, prices then continued higher, and using Bulkowski's (2005) measure rule of the height of the rounding bottom multiplied by 57% and then added to the breakout price, a trader would have exited with a profit before prices started to consolidate again and create a horizontal rectangle formation.
Rounding Top Breakout to Downside Chart Example
The weekly chart above of the Financial SPDR (ETF) illustrates a rounding top formation after an uptrend and then a subsequent breakout to the downside. Prices accelerate upward and then slow down and begin to rollover and head downward creating the inverted bowl visual. Prices hit roughly the same price area as the left lip and begin to consolidate sideways. However, when price penetrates below the consolidation area support line, then a sell signal is triggered. Even though the price bar that penetrated the support line of the right lip closed far below that broken support line, using the historical measure rule of height of pattern minus breakout price or Bulkowski's height of pattern multiplied by 24% minus breakout price, either price target would have resulted in a profit.
Rounding Top Breakout to Upside Chart Example
The Mid-Cap 400 ETF (MDY) weekly chart shows an uptrend followed by a rounding top followed by a continuation of the uptrend higher. The typical price breakout to the upside of the rounding top pattern is triggered when prices close above the highest high in the rounding top formation. Using the price target formula outlined by Bulkowski, the height of the rounding top pattern (Highest High minus right lip) multiplied by 61% and then added to the breakout price would have resulted in a profitable trade.
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