Rounding Bottom Pattern: Meaning, Benefits & Examples

The Rounding Bottom Pattern is a Long Term Reversal Pattern that is best suited for weekly charts. It is also referred to as saucer bottom pattern. It is a trend reversal pattern used in technical analysis to identify the end of a downward trend and the gradual price shift from a bearish to a bullish trend.

What is Rounding Bottom Pattern?

The Rounding Bottom Pattern consist of a rounded bottom U formation and a neckline resistance level in terms of structure. Rounding Bottom Pattern is sometimes known as saucer bottom pattern and can predict long term upward trend. It is very similar to cup and handle pattern. The pattern is a long term reversal pattern and it is applied to weekly charts representing consolidation. That turns from bearish to bullish.
This Rounding bottom pattern can be spotted at the end of a depressingly long downward trends. The timeframe for this pattern can be weeks, months or even years in length and is considered to be one of the more rarified patterns to form in the marketplace.
Most of the time, this pattern indicates that the long downward trend often caused by an excess stock supplies, is coming to an end as investors start to buy in at low price points reversing the downward movement. It typically increases demand and pushes up the stock prices.
This allows the stock to break out and begin a long lasting and positive rehearsal that investors can take advantage of if they choose to be one of those who buy low and are willing to sit on the stock for a while until it tops out again.

How a Rounding Bottom Works ?

This pattern, has its own journey from where it gets initiated till the time it gets completely formed and is visible to traders and investors.
Rounding Pattern is similar to the cup and handle pattern. It does not experience the temporary downward trend of the handle portion. The initial declining slope of the rounding bottom indicates excess supply which forces the stock price down.
When the buyers enter the market at a low price, which increases demand for the stock the transfer to an upward trend occurs. The transfer to an upward trend occurs when buyers enter the market at a low price and this increases the demand for the stock.
Once the rounding bottom is complete the stock breaks out and then it continues its upward trend. The rounding bottom chart pattern is an indication of a positive market reversal.
The rounding bottom chart pattern is also known as a saucer bottom. It has bowl like appearance. The recovery period much like the downturn may take months to combine, thus investors should be aware of the potentially lengthy patience required till the full recovery in stock prices.

How to Identify Rounding Bottom Pattern

A rounding bottom pattern can be divided in to several main parts. The prior top trend shows the buildup to the stock’s initial descent towards its low. 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.

A Rounding Bottom Chart Pattern looks like the Rounding Top Chart Pattern if it was flipped horizontally. Just like its bearish counterpart, it also comprises three identifiable sections, which are listed as follows:

Initial Existing Downtrend: The construction of this pattern is also marked by an existing trend. In the case of the Rounding Bottom Pattern, however, the initial trend that marks the beginning of the pattern is a downtrend. Post successful completion of this reversal pattern, it is this downtrend that will come to an end.
Rounding Bottom Section:With this pattern, the initial downtrend is followed with the gradual loss in momentum of price decline. This gradual loss in momentum eventually results in the downtrend tapering off, resulting in a U shaped formation on the chart. This U shaped formation makes the rounding bottom section of the pattern.
New Uptrend: This is the final section in the formation of the Rounding Bottom Pattern. Post the development of the U-shaped formation at the bottom, there is an emergence of a new uptrend. Successful completion of the Rounding Bottom Pattern is marked with the confirmation of this new uptrend.

The trading volume in a rounding bottom chart pattern ideally follows 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 also reaches its bottom.

The volume of shares traded usually peaks when the decline begins and when the stock reaches its previous high with the building volumes on the approach.

The rounding bottom appears when a price forms a trough in a bearish trend and rebounds creating a gradual curve that becomes more pronounced. It is usually confirmed when the security breaks above its resistance level known as neckline.

The resistance or the neckline, is a technical level of resistance that forms a horizontal line connecting the high points in the rounding bottom, where the market has struggled to break above.

A Rounding Bottom Chart Pattern Example

In the daily price chart of Netflix stock, a rounding bottom pattern formed. It leads to a very large bullish trend after the price breaks out from the rounding bottom resistance level. This is an example of how a successful rounding bottom pattern looks in the stock market.

Parts of Rounding Bottom Chart

Rounding Bottom Chart can be divided into several parts. The prior trend shows the buildup to the stocks initial descent toward is low. The trading volume would be the heaviest at the start of the decline and then would decrease the share price levels off. 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.

Benefits of Rounding Bottom Pattern

The rounding bottom reversal structure can be identified and traded on all instruments and asset classes and on all time frames. So long the “U” shape can be drawn and trade line can be identified, you know you have the correct view and the pattern is there to be traded.

How Do We Trade The Rounded Bottom?

The Rounding Bottom is a bullish trend reversal chart pattern that signals the end of a downward trend and the beginning of an upward trend. The rounding bottom pattern can be spotted at the end of depressingly Long downward trends. The timeframe for this pattern can be weeks.
As the example below shows; price is first trending lower. Price then moves into the bottom phase. During this phase it is very common for price to move sideways or consolidate for a period. Price will then breakout of the consolidation and make a move higher. Once the neckline of the rounding bottom pattern is broken the pattern is complete.
Whilst the rounding bottom pattern can be used on any time frame, the best time frames to identify and use this pattern are the higher time frames like the daily chart. The higher time frames can give you greater market clarity and also help you analyze potential trades for the smaller time frames like the 4 hour and 1 hour charts.

Conclusion

The rounding bottom pattern has a visual resemblance of a bowl-like appearance. It represents a gradual price shift by investors from bearish to bullish. It confirms a rounding bottom by the high volumes during the decline, then flat volumes during the middle range, and higher volumes again as the price increases. Traders who are able to identify the rounding bottom successfully should expect upward price action equal to the size of the pattern.
The pattern represents the gradual price that shifts from bearish to bullish. The strong confirmation of the pattern comes with the volume indicator. The rounding bottom will start with high volume during the decline and flat volumes during the range.