What Is an Inverse Saucer?

An inverse saucer is a technical charting pattern that indicates that a given stock's price has reached its high. According to this technical indicator, this formation indicates that a stock's upward trend has come to an end. An inverse saucer is also known as a "rounded top" or "rounding top".

Key Takeaways

  • An inverse saucer is a technical charting pattern that indicates that a given stock's price has reached its high.
  • According to this technical indicator, this formation indicates that a stock's upward trend has come to an end.
  • An inverse saucer occurs when there is a steady flattening of the uptrend.
  • An inverse saucer is a rare formation; it provides no clear price target but usually indicates that the stock is in danger of a steep price drop.

An inverse saucer occurs when there is a steady flattening of the uptrend. This happens to such a degree that the market at one moment enters a sideways range, but then slowly starts to fall and finally accelerates downward. An inverse saucer is a rare formation; it provides no clear price target but usually indicates that the stock is in danger of a steep price drop. Retracements of the preceding uptrend have been noted in inverse saucer patterns.

Inverse Saucer
Image by Julie Bang © Investopedia 2020

How an Inverse Saucer Works

Inverse saucers occur as expectations about a stock gradually shift from bullish to bearish. In other words, an inverse saucer occurs as investor sentiment about a stock shifts from positive to negative—from the belief that a stock's value will go higher to the expectation that it will fall lower.

The gradual yet steady shift forms a rounded top. Volume—which was high during the previous trend—decreases as expectations shift and traders become indecisive. The volume then increases as a new weakening trend downward is established.

An inverse saucer pattern can portend a more serious breakdown of the price of the security in a short time frame. An inverse saucer can also be followed temporarily by what is known as a handle, which reflects a partial recovery of price from its decline before the price descends again.

These two patterns have been repeatedly observed, but there is no guarantee, naturally, that they always occur. Generally speaking, though, inverse saucers are bearish indicators, and traders who follow these indicators take action to protect long positions when inverse saucers occur—for example, by setting stop losses or by shorting these vulnerable securities.

Saucer vs. Inverse Saucer

An inverse saucer is related to the technical charting pattern called a saucer. Visually, a saucer appears to be the opposite (or the reverse) of an inverse saucer. Likewise, a saucer forms when a security’s price has reached a low and begins trending upward. (Conversely, an inverse saucer forms when a security’s price has reached a high and is predicted to trend downward.) A saucer is referred to as a rounding bottom.

Volume during inverse saucers often mirrors the bowl-like shape of prices during a saucer.