What are Rounding Top?
The “rounding top” is a reversal chart pattern that develops after a price incline. When it is graphed, it forms an inverted U Shape. Rounding tops are found at the end of extended uptrend trends and signify a reversal in long-term price movements.
How does it work?
The initial inclined slope of a rounding top indicates an excess demand, which forces the stock price upwards. The transfer to a downward trend occurs when sellers exit the market at a high price, which in-turn decreases the demand for the stock. Once the rounding top is complete, the stock breaks out and continues its new downward trend. This pattern also requires a sustained price move to the upside before consolidating for an extended period and forming the rounding top. The price then begins to rally back below the neckline of the consolidation area. At this point the pattern has been completed.
- There must be a prior uptrend to reverse.
- A trader is supposed to get long once the stock is able to break through the neckline.
- Volume levels will track the shape of the rounding top: low at the beginning of the incline, 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.