Yesterday, I tweeted here that the averages were displaying characteristics of rounding bottoms. These rounding patterns or “rounding turns” as they are also known were later confirmed. In this update I’m going to be briefly describing rounding bottoms and what they mean.
Rounding bottoms are also known as Bowl, Saucer, or Cup Patterns. In addition, a series of rounding bottoms are known as Scallop Patterns. Rounding bottoms are often significant because they take several months to come to fruition. Of course, as a Market Technician you remember that all technical analysis is fractal. The fractal nature of trends means that patterns can occur for any time period and on any interval chart. The implications are the same except that they vary in significance as related to the length and interval by which they were formed. A daily rounding bottom does NOT attempt to forecast weeks or months into the future, nor would a year-long rounding turn signify anything less than several months of significance. Understanding this principle is key to all technical analysis.
A Rounding Bottom is usually a clean-cut and decisive price pattern, though there is some discrepancy as to how deep a pattern can be and still be considered a rounding turn. As a rule of thumb, any rounding turn should be wider than it is tall. What happens in a rounding bottom is that gradual, but steady, dominance of demand overtakes supply – especially after a large down move. The selling pressure slowly and consistently fades while volume almost always declines at or near the bottom. This gives rise to a horizontal movement as the two forces are in equilibrium. This is followed by an increase in demand that creates an arc pattern.
Volume is often the lowest during the horizontal phase of the turn as relatively few transactions are recorded. This, along with either a brief but sharp down-up or up-down movement in the very center of the bowl, is a tell-tale sign that the move is genuine. Sometimes volume can be greatest at the horizontal, central point, in a sort of inverted volume pattern. The key to remember here is that you are looking for a volume peak or nadir that occurs at or very near the middle. The volume analysis is less important on an intra-day basis (since volume will always be at a low-point during midday) and much more important on a daily, weekly, and especially monthly basis.
These rounding patterns should occur after an extensive decline in order to signal outstanding significance “as they nearly always denote a change in Primary Trend and an extensive advance yet to come.” With the exception of low-priced and speculative issues, the advance will gradually succeed the pattern itself and be prone to several interruptions, though very likely to yield a profit over time. Of course “time” in this case is relative to the pattern. In the case of low-priced and speculative issues, a Saucer Pattern can lead prices to quickly skyrocket in an almost vertical move, as seen below.
Knowing how to identify patterns, as well as their implications, is critical in learning technical analysis and becoming a Chartered Market Technician.