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Indicator Free Analysis of Rounding Bottom Pattern- A Case Study

Education
NSE:RELIANCE   RELIANCE INDS
The above chart is that of a Weekly Timeframe . Here we can see that a Rounding Bottom is formed at the top of Reliance when it is trading at all time high.

Why a Rounding Bottom is formed?

A rounding bottom marks a struggle between buying demand and selling pressure that is almost equal. In the first part of the formation, the sellers overpower the buyers thus bringing down the prices sharply until both buying and selling pressures equalize giving rise to a flat horizontal bottom. Eventually the buyers reappear and the stock edges higher. However the upward movement is not smooth and is riddled with several sharp upspikes accompanied by down spikes. As the stock reaches the previous high/ resistance, the selling pressure resumes and pushes the stock a little bit lower giving rise to a small handle i.e. forming a cup and handle pattern. However a cup may not be always formed.

What does the Rounding Bottom Represent?

A Rounding bottom can generally be seen as a form of consolidation after a strong bullish or bearish trend .

What does the Rounding Bottom lead to?

A Rounding Bottom can signal 2 changes in the stock: Continuation or Reversal. In most cases, it signifies continuation of the trend. Rounding bottom as a continuation pattern is mostly true for bull run. It signals reversal mostly in cases of bear run. However reversals are rare in Bull runs.

How to Trade a Rounding Bottom? ( Trading Psychology and Strategy)

We shall discuss about the Trading Strategems keeping the above example as focus.

We can observe that the previous trend was a bullish trend . Hence the Rounding Bottom formed in the chart is most probably a period of consolidation. The Rounding Bottom formation has formed over a period of 1 year. The recent weekly candle was a strong bullish green candle ( Marubozu Candle) which has closed above the left lip of the rounding bottom/ previous high of the pattern. This shows a clear breakout scenario.

Where to Enter?

We can enter at the present market price of 2380-2400.

Where should be our Stop Loss?

Our ideal Stop Loss should be below the recent swing i.e. around 2000-2100. If the stock forms a handle, then our stop loss should be below the handle.

What should be our target?

In case of a Rounding Bottom Pattern or a Cup & Handle Pattern, the target can be gauged from the depth of the cup or rounding bottom. Here the depth of the rounding bottom comes to around Rs 550- Rs 600. Hence the target should be Rs 550- Rs 600 from the breakout levels of 2385 i.e. our target should be between Rs 2850-3000.

Important Points to Remember:

1. Use or prefer weekly charts for identification of rounding bottoms since these patterns are formed over a long period of time.

2.Prefer trading the roundin bottoms in a bull market of if the previous trend of the stock is bullish since there is a higher rate of success and
lower chances of breakout failure.

3. Try to select patterns whose breakouts are near all time high or year high.

4. The target is generally reached between 4 to 5 weeks into trade. Thus profit should be booked timely. However one can wait for long term targets to be achieved.

5. Prefer those patterns where the breakout occurs with good volume in a bull market with a clear cut breakout (like here the breakout was given with a strong Marubozu candle with good volume ).


Contribute to my efforts with cheers and coins (lol) if you learnt something valuable.

Hope you guys learn and trade responsibly only after understanding the mechanics behind the pattern. Always try to keep the analysis simple and devoid of indicators. Indicators should only be used as supplementary tools for additional confirmation and not absolute trading tools. Maintain a strict SL to restrict and minimize your losses.

Credits - Encyclopedia of Chart Patterns (2nd Edition) by Thomas N. Bulkowski

Thank you.
Trade active: Stock is up by 3% from recommended levels in just 1 day. Cheers to those who bought it..