What is a Rounding bottom?
• A rounding bottom is a chart pattern that graphically forms the shape of a “U”.
• This pattern is found at the end of extended downward trend and signify a reversal.
• It is also referred to as a saucer bottom.
• Ideally, volume and price will move in tandem.
Parts of a Rounding Bottom:
A rounding bottom chart can be divided into several main areas.
1. Prior Trend: In order to be a reversal pattern, there must be a prior trend to reverse. Ideally, the low of a rounding bottom will mark a new low or reaction low. The stock may trade flat before forming the pattern.
2. Decline: The first portion of the pattern is the decline that leads to the low of the pattern. This decline can take on different forms: some are quite jagged with a number of reaction highs and lows, while others trade lower in a more linear fashion.
3. Low: The low of the rounding bottom can resemble a “V” bottom, but should not be too sharp. Because prices are in a long-term decline, the possibility of a selling climax exists that could create a lower spike.
4. Advance: The advance off of the lows forms the right half of the pattern and should take about the same amount of time as the prior decline. If the advance is too sharp , then the validity of a rounding bottom may be in question.
5. Breakout: Bullish confirmation comes when the pattern breaks above the reaction high that marked the beginning of the decline at the start of the pattern.
6. Volume: In an ideal pattern, 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. Volume levels are not too important on the decline, but there should be an increase in volume on the advance and preferably on the breakout.