What Is a Rounding Top?
A rounding top is a price pattern used in technical analysis. It is identified by daily price movements, in particular the tops, which when graphed, form a downward sloping curve. Technical analysis of price information suggests that a rounding top may form at the end of an extended upward trend and that this price pattern may indicate a reversal in the long-term price movement.
The rounding top pattern can develop over several days, weeks, months, or even years, with longer time frames to completion forecasting longer changes in trend. It may be contrasted with a rounding bottom.
- A rounding top is a chart pattern used in technical analysis identified by price movements that, when graphed, form the shape of an upside-down "U."
- Rounding tops are found at the end of extended upward trends and may signify a reversal in long-term price movements.
- The duration of the pattern may take months or sometimes years to coalesce. Investors should be aware of the potentially lengthy timeframe necessary to realize a full downturn in price.
Understanding the Rounding Top Pattern
A rounding top pattern is similar to that of an inverse saucer pattern. It is also similar to, and may occur coincidentally with, a double top or triple top price pattern. The main point of recognizing the rounding top pattern is to anticipate a significant change in trend from upward trending prices to downward trending prices. Recognizing this kind of a change can allow traders to take profits and protect themselves from buying into an unfavorable market, or strategize to make money from falling prices by short-selling.
The rounding top pattern has three main components:
- first, a rounding shape where prices trend higher, taper off, and trend lower;
- second, an inverted volume pattern (high on either end, lower in the middle of the pattern);
- third, the support price level found at the base of the pattern.
Rounding Top Pattern
When following a rounding top, traders may also watch volume which is usually higher as the charted price increases and decreases on a downtrend. In a rounding top, a curved trend line following peak highs forms an inverted "U" shape. In this pattern, the price of the security will increase to a new high, then steadily decreases from a resistance level to form the rounding top. Volumes will usually be the highest when the price is increasing and may experience another high on the downtrend during the selloff phase.
Generally, a rounding top will also represent a bearish future outlook for the security. However, investors should be cautious when following a rounding top as support for the security’s price can occur causing several rounding tops to follow in a double top or triple top pattern.
Example of a Rounding Top
In this example, the price of Goldman Sachs (GS) reached a peak near the beginning of 2011 and gradually began selling off from that point. This example is unique in that two rounding top patterns are observed with coincident peaks, one of them (blue lines) a shorter duration than the other (black lines).
Price Forecast After Rounding Top Pattern
As with all technical chart patterns, the rounding top pattern is not some infallible prediction device. It is a technical pattern suggesting that investors in the stock are weakening in their resolve to hold the stock and may begin selling shares in larger numbers. This doesn't always happen. When the price fails to follow through with a downward trend after the pattern has been exhibited, it has been observed to rebound from the support level and begin retracing higher prices.
Some observers suggest that if the price rises more than thirty percent of the distance from the support level heading back towards support, that the likelihood that it will make new highs is increased. At that point, the price pattern is exhibiting a bullish forecast until it reaches the previous high.
Relationship to the Double Top
If a rounding top series chart does not lead to a reversal, then it may begin to head back to previous highs. If at those highs it meets resistance again, it is likely to form a double top. In a double top pattern, a security’s price will show two consecutive upside-down U-shaped patterns. In these scenarios, investors are not completely bearish and still believe that the security’s price could remain at peak levels.
A double top of this kind, the combination of two rounding tops, is likely a very bearish indicator because buyers have now tried twice, and failed, to see their expectations for higher prices achieved. This pattern forms when investors are resisting a bearish trend, and when they no longer resist and begin to exit the pattern, they may do so rapidly. Generally, this pattern, like a rounding top, will indicate the end of a bullish trend.