What is a Rounding Top
A rounding top is a chart pattern used in technical analysis which is identified by price movements that, when graphed, form the shape of an upside down "U". A rounding top may form at the end of an extended upward trend and will often indicate a reversal in the long-term price movement. The pattern can develop over several weeks, months or even years, and is considered a rare occurrence by many traders
BREAKING DOWN Rounding Top
A rounding top pattern may also be described as an inverse saucer. Conversely, it is the opposite of a rounding bottom. It may also be associated with a double top or triple top.
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 trendline following peak highs forms an upside down U shape. In this pattern, the security’s price will increase to a new high. It 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.
A rounding bottom serves as the opposite of a rounding top with adverse signals. In a rounding bottom the price begins with a decreasing price trend until it reaches a support point. Once reaching the support point, the price will begin to trend higher. A trendline following the price’s lows will form a U shape. Rounding bottoms can signal a reversal as well which would lead to a bullish future outlook for the security. This pattern can also be followed by another rounding bottom forming a double bottom if the price resists a bullish trend. In a rounding bottom expected to result in a reversal, traders seek to take long positions at the support level to profit from future gains.
If a rounding top series chart does not lead to a reversal, then it may 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.
Ultimately, a double top is the combination of two rounding tops. This pattern forms when investors are resisting a bearish trend. Generally this pattern, like a rounding top, will indicate the end of a bearish trend. With a double top the pattern forms a valley between the two upside down U shapes which is considered a neckline. The neckline becomes an important support level. After the second rounding top a price will typically not rally again and usually descends below the neckline in a bearish reversal.
Positioning for a double top can be similar to positioning for a rounding top. A double top is also seen as a reversal pattern. Therefore, investors will typically take short or selling positions once the second rounding top nears the neckline.