Hey, this is Sasha and welcome to another episode of “Let’s Talk Stocks.”
In this episode, we’re going to go back into some technical analysis basics.
Rounding Bottom Stock Chart Pattern
I’m going to take a look at the rounding bottom stock chart pattern.
A rounding bottom when it comes to stock charts is a reversal pattern. It doesn’t always have to be a reversal pattern but typically what happens is — you go ahead, and you create this rounding bottom effect.
Often, it comes from let’s say higher prices then stocks play around and isolate here kind of like a digestion pattern to change that momentum around of that direction.
You got a little bit of resistance right up here at these swing points or levels, and then the stock will eventually break out.
Often, it can retest that support or resistance. So this will be a resistance or support level that’ll retest and then it can continue to move higher.
You’re looking at it like this.
Sometimes, it can also come from lower prices. Meaning, being a little more bullish and then you have a pause, and then you move higher.
This is the way that the pattern looks like.
Sometimes also known as a saucer pattern, when you’re looking at it because it is like a saucer.
It’s a little different than the cup and handles pattern.
The cup and handle would have a handle here, whereas this one is retesting this support right so your entry when you’re looking at this stock would be probably over here or when it retest, so these would be your two entry areas.
When you’re looking at the volume for this, often the volume declines on this pattern because you’re digesting the movement.
Sometimes, later on, as it starts to pick up speed because you’re changing directions, you might have or see an increase in volume and especially on the breakouts if you see a strong breakout that volume might be a little bit strong. So keep an eye out on that just because of the decline in volume here as you’re digesting.
Overall, the pattern works in the way we’re digesting sideways.
Instead of just going sideways, like many other stock patterns do where they’re just isolating in this range, well this one creates a little bit more of a friendly turn around.
Think of it like a big boat turning around.
That’s really what it does. Sometimes, you can move here and then it’ll go back down. It may look a little weird that maybe it’s not a perfect saucer or a perfect rounding bottom, but it creates that rounding softens the cushioned effect.
If you’re looking for a target or a projected move in this
You’re looking at the, let’s say the top of that saucer almost to the bottom of that, that’s a good range and then take a look at how far that can go and draw that up here.
This would be your target, of course, if your stock is moving to the upside. I mean, it can go much further. It’s just that initially with the pattern, that’s the target.
And then with inflation just due to price rising, it can move much further and beyond those prices.
But that’s a good guideline for a primary target where you may want to take some profits.
I’ve also seen that this chart pattern sometimes, depending on the number of ticks can get confused with let’s say kind of like a Head and Shoulders pattern. Because overall with a Head and Shoulders pattern, when you see that pattern, you might see something like this. It looks like a rounding bottom as well.
What I want you to remember
It’s not as important how to correctly identify — is that a head and shoulders or are that a rounding bottom? These patterns do have some technical specifics to when you can claim them a rounding base or a head and shoulders or a cup and handle.
But overall, your primary goal and objective are to say, hey where’s my entry point and often it’s just that top of that saucer or where it starts with that resistance level.
So, you’re watching that and the influx of strong volume.
When you see strong volume coming in and price moving past resistance levels really, that’s more of a key and more important than is it the rounding bottom or is it the cup and handle.
It does not matter. What’s more important is hey where do I get in, how do I manage my money, how do I manage that position and that’ll be a little bit more favorable.
But as far as the rounding bottom pattern goes, understand, it’s more of a pausing pattern.
Often, it’s a reversal pattern, but it can be both. It pauses that stock to allow it to consolidate, to distribute the shares so that it can build more energy to move to the next stage.
Stocks don’t go up every single day. They need time to pause and digest, and that’s what this pattern does.
It’s usually a little bit of a more extended pattern. Many patterns are six to eight weeks, just like the cup and handle. This one might be eight to twelve weeks, and it could be a little long depends on market conditions.
But just something to watch that is just, you’re looking for a change in direction often or just a pause and break in an excellent movement to the upside or the downside. Is only pausing that movement allowing things to digest so that way you can continue further into higher or lower prices.