What Is a Rounding Bottom?
A rounding bottom is a chart pattern used in technical analysis and is identified by a series of price movements that graphically form the shape of a "U". Rounding bottoms are found at the end of extended downward trends and signify a reversal in long-term price movements. This pattern's time frame can vary from several weeks to several months and is deemed by many traders as a rare occurrence. Ideally, volume and price will move in tandem, where volume confirms the price action.
How a Rounding Bottom Works
A rounding bottom looks similar to the cup and handle pattern, but does not experience the temporary downward trend of the "handle" portion. The initial declining slope of a rounding bottom indicates an excess of supply, which forces the stock price down. The transfer to an upward trend occurs when buyers enter the market at a low price, which increases demand for the stock. Once the rounding bottom is complete, the stock breaks out and will continue in its new upward trend. The rounding bottom chart pattern is an indication of a positive market reversal, meaning investor expectations and momentum, otherwise known as sentiment, are gradually shifting from bearish to bullish.
A Rounding Bottom Chart Example
The rounding bottom chart pattern is also known as a saucer bottom given the visual resemblance and bowl-like appearance. The recovery period, much like the downturn, may take months or years to coalesce; thus, investors should be aware of the potentially lengthy patience necessary to realize a full recovery in stock price.
Parts of a Rounding Bottom Chart
A rounding bottom chart can be divided into several main areas. First, the prior trend shows the buildup to the stock's initial descent toward its low. Picturesquely, the trading volume would be the heaviest at the start of the decline and then would decrease as the share price levels off and approaches the bottom of the pattern formation. As the stock recovers and moves to complete the pattern, volume increases as investors buy shares again. The rounding bottom breaks out of its low point when the stock price closes above the price immediately prior to the start of the initial decline.
The trading volume in a rounding bottom chart pattern ideally follows (and confirms) the direction of the stock price, but it is unnecessary to have perfect volume price correlation. Often, trading volumes are at their lowest point when the share price also reaches its bottom. The volume of shares traded usually peaks at the beginning of the decline and when the stock reaches its previous high with building volumes on the approach.