Rounding Top pattern

Hey everyone! 👋

Last week, we wrote about the "Rounding bottom" pattern. If you missed last week’s post, you can catch up here:

Today we are going to cover the "Rounding top" pattern along with a few examples.

Please remember this is an educational post to help all of our members better understand concepts used in trading or investing. This in no way promotes a particular style of trading!

The post will shed some light on the following topics:
➡ Basics and identification of the pattern
➡ Components
➡ Important aspects

What is a Rounding top pattern?

• A rounding bottom is a bearish reversal pattern that resembles the shape of the inverted "U".
• Rounding top pattern occur at the end of long uptrends and indicate a potential reversal.
• The pattern is also referred to as an inverted saucer due to its resemblance to an inverted saucer.
• Although, the volume and price move in sync but in practice, this can vary widely.
• When the price moves down from the neckline, it indicates weakness and suggests that the stock may begin a new downtrend.

Components of a Cup and Handle pattern:

A rounding bottom pattern can be divided into three main parts.
• Advance
• Formation of the base
• Decline

Important aspects:

1. Prior Trend: Since it is a bearish reversal pattern, the prior trend must be an uptrend. The top of a rounding bottom should ideally mark a new high or reaction high. The stock may trade sideways or flat for a long duration before the formation of the pattern.

2. Advance: The advance that leads to the formation of the high, can take a variety of forms. Sometimes, the up move has many whipsaws while other times, the stock may just trade flat.

3. High: In general, the pattern resembles an inverted "U" shaped top. However, it can also resemble an inverted "V" or an "M," but the high should not be too sharp. In addition to this, there is always a possibility of a new high due to a buying climax.

4. Decline: In general, the formation of the right half of the pattern should take about the same amount of time as the left half. This means that the down move of the highs should take about the same time as the up move. Moreover, the decline shouldn't be too sharp, or else there is a possibility of a bear trap.

5. Breakdown: The pattern is confirmed once the price breaks and sustains below the neckline. The price may return to the neckline to test for the supply before continuing downwards.

6. Volume: In general, the volume levels should be
- High during the up move
- Low during the formation of the base
- Rising during the down move

However, these are only guidelines and should not necessarily be taken at face value.

7. Target: Using the measurement objective, the target comes out to be equal to the depth of the base. It can be measured by calculating the distance between the bottom of the base and the neckline.

8. Stop-loss: Ideally, the stop loss is placed at the highest point of the base. But if the price oscillated up and down a number of times near the neckline, the stop-loss can also be placed above the most recent swing high.

Exhibit: Rounding top pattern with a failed breakout

Thanks for reading! As we mentioned before, this isn't trading advice, but rather information about a tool that many traders use. Hope this was helpful!

See you all next week. 🙂
– Team TradingView

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