Round Bottom Chart Pattern

Round Bottom Chart Pattern

Implication

A Rounded Bottom is considered a bullish signal, indicating a possible reversal of the current downtrend to a new uptrend.

Description

Rounded Bottoms are elongated and U-shaped, and are sometimes referred to as rounding turns, bowls or saucers. The pattern is confirmed when the price breaks out above its moving average.

Important Characteristics

Following are important characteristic to look for in a Rounded Bottom.

Shape

The price pattern forms a gradual bowl shape. There should be an obvious bottom to the bowl. Price can fluctuate or be linear; however, the overall curve should be smooth and regular, without obvious spikes. For example, a V-shaped turn would not be considered a rounded bottom.

Volume

Volume tends to mirror the price pattern. Consequently, as the rounded bottom begins to descend, volume tends to decrease as bearishness wanes and investors become indecisive. Following a period of relative inactivity, at the bottom of the bowl, the price pattern starts its upward turn. As sentiment becomes more decisively bullish, volume tends to increase. When looking at volume in a rounded bottom pattern, Robert D. Edwards and John Magee note that "volume accelerates with the [price] trend until often it reaches a sort of climactic peak in a few days of almost 'vertical' price movement on the chart."

Duration of the Rounded Bottom

Rounded Bottoms are long-term patterns. Martin J. Pring identifies that the pattern can occur over a period of about 3 weeks, but can also be observed over several years.

Trading Considerations

Duration of the Pattern

The duration of the pattern indicates the significance of the price movement. John J. Murphy writes that rounded bottoms "are usually spotted on weekly or monthly charts that span several years. The longer they last, the more significant they become."

Target Price

Understandably, investors like to buy at the lowest possible price. However, even the most promising-looking rounded bottoms patterns can fail. To determine whether a downturn has bearish potential, watch the price at the bottom of the downturn. For a rounded bottom, the price tends to hover and bounce between an upper and lower price limit. You may observe this behavior for weeks or even years, as knowledgeable investors accumulate stock at the lowest possible price.

Clifford Pistolese advises that, "If well-informed, long-term investors are buying within the trading range, the eventual breakout will probably be to the upside." To manage risk, both Pistolese and Thomas N. Bulkowski suggest that investors buy stock when the breakout actually occurs.

Price may end higher or lower than it was at the beginning of the formation. After an upside breakout, technical analysts may use the starting price at the left side of the bowl to determine where the price may head. However, you will want to monitor the stock with interest.

Criteria that Supports

Volume

Volume should parallel the price formation, dropping off as the pattern reaches the bottom, then increasing as the new uptrend is established.

Moving Average

Moving averages help to determine whether the rounded bottom has the potential for an upside breakout. For a rounded bottom, the price should cross the moving average when it begins to ascend. When this crossover occurs, the pattern is "confirmed".

There is an abundance of literature about moving averages if you are interested in understanding how they operate. In simple terms, the moving average can be used to detect a possible pattern success or failure. Typically, a moving average represents the closing price of a stock over a specified number of days, and can be used to predict the general direction of a stock. Depending on the type of stock, investors may decide to use a long, medium or short term moving average. For example, short duration patterns generally use a 50-day moving average, and longer patterns generally use a 200-day moving average.

Criteria that Refutes

Shape

A formation is not a true rounded bottom when it does not involve a period of consolidation. Consolidation occurs following the descent when the price at the bottom of the pattern seems to bounce between an upper and lower limit. While, there are V-shaped patterns that yield successful returns, the rounded bottoms are a more reliable and predictable formation.

Underlying Behavior

A Rounded Bottom forms as investor sentiment shifts gradually from bearishness to bullishness. As the sentiment turns down toward the bottom, there is a drop off in trading volume due to the indecisiveness in the market. There is a period of consolidation at the bottom as trading bounces within a certain range, then finally there is a gradual upturn marking the shift to bullishness. As investors become more decisive about the bullishness, there is an increase in trading volume.