What Is a Saucer?
A saucer, also called a rounding bottom, refers to a technical charting pattern that signals a potential reversal in a security’s price. It forms when that security’s price has reached a low and begins trending upward.
- A saucer, or 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".
- Both envelope channels and standard trading channels are important patterns for a trader when seeking to identify and place profitable trades from a saucer formation.
- Typically, traders will want to buy the security or buy call options on the security at its lowest price in order to obtain the greatest profit from an up trending saucer pattern.
Saucers usually form at a security’s support levels, whether it be trendlines, channels, or any other measure that defines that security's supply/demand relationship. They occur when a financial instrument declines to a low and then begins trending upward. This price action results in a chart pattern in the shape of a "U" and is generally very rounded with a flattish bottom.
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.
Some key elements for saucer patterns include:
- A prior price trend, in this case downward, must exist.
- The decline in price should make a low, start a consolidating phase which turns momentum from bearish to bullish, before reversing course and breaking out above the neckline.
- The saucer's neckline can be identified by the price point just before the rounding pattern starts forming, and is validated when the price reverses through that point.
- The volume can be an important indicator of a potential saucer formation since it will, typically, be lower when the trough of the pattern is reached.
- Though there is no theoretical price objective for the move higher, some technicians have recommended that one can take the depth of the U, divide that by two, and add that to the neckline.
Traders can use a variety of different channels to chart resistance and support trendlines around a security’s price. Envelope channel patterns are fluid formations that can help to follow a security’s price over long periods of time. A Bollinger Band channel is one of the most common envelope channels used. This channel draws resistance and support trendlines two standard deviations above and below the moving average. Various other envelope channels with differing methodologies for charting trendlines also exist including Keltner Channels and Donchian Channels.
Traders seeking tighter resistance and support trendlines may also draw channels at the peaks and troughs of a security’s price over a certain time-frame. These channels will be either ascending, descending, or sideways depending on the security’s price trend.
Saucer Trading Signals
Both envelope channels and standard trading channels are important patterns for a trader when seeking to identify and place profitable trades from a saucer formation. A saucer will typically form at the support trendline. It may occur from a selloff with high volume that pushes the price down to its lowest level. Often this low price level will be in the support zone, which is an area around the support trendline.
In the support zone, there is often a great deal of price uncertainty. The support zone is known for serving as the security’s floor and therefore it is anticipated that the price will not fall below that level. However, trading mechanisms, supply and demand, all factor into the security’s price and can cause the price to continue trending lower below the support level. Volume can often be an important indicator at this point since it is highly influenced by the pricing sentiment of investors.
If the price does not trend lower and begins an uptrend, then a saucer occurs. This is the most anticipated movement and follows traditional investing methodology. Typically, traders will want to buy the security, or buy call options, on the security at its lowest price in order to reap the benefits from a saucer pattern.