The Series of Chart Patterns Chapter 15: “Rounding Bottom

What is Rounding Bottom?

The rounding bottom is a reversal chart pattern, which develops after a price decline. When it is graphed, it forms a U Shape. Rounding bottoms are found at the end of extended downward trends and signify a reversal in long-term price movements.

How does it work?

A rounding bottom looks similar to the cup and handle pattern, but does not experience the temporary downward trend of the “handle” portion. The initial declining slope of a rounding bottom indicates an excess of supply, which forces the stock price to go down. The transfer to an upward trend occurs when buyers enter the market at a low price, which increases demand for the stock. Once the rounding bottom is complete, the stock breaks out and will continue in its new upward trend. This pattern also requires a sustained price move, this time to the downside before consolidating for an extended period and forming the rounded bottom. The price then begins to rally back above the neckline of the consolidation area. At this point, the pattern has been completed.

Key things to remember while trading with Rounding Bottom?
  • There must be a prior downtrend to reverse.
  • The low of the rounding bottom can resemble a “V” bottom, but should not be too sharp and should take a few weeks to form. As prices are in a long-term decline, the possibility of a selling climax exists that could create a lower spike.
  • A trader should look to go long once the stock is able to break through the neckline.
  • Volume levels will track the shape of the rounding bottom: high at the beginning of the decline, low at the end of the decline and rising during the advance.
  • The minimum target for the pattern is equal to the size of the pattern when added to the breakout. Once the price hits your target, you should look to exit the position.

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