Chart Your Way to Profits: The Online Trader's Guide to Technical Analysis with ProphetCharts, Second Edition

Chapter 10. Rounded Tops and Saucers

Two of the most important events that occur repeatedly in technical analysis are breakouts and reversals. A breakout is the act of a price escaping from a relatively tight price range, either to the upside (a breakout above resistance) or the downside (a failure below support). A reversal is the act of a price changing directly either from (1) up to down or (2) from down to up. What is going on in each case is the same—an escape from a price range. The terminology differs only to state what has happened prior to that escape.

Breakouts and reversals are crucial events to discern on a chart since they can make you money, and two of the most common patterns found on charts that relate to these events are rounded tops (at the peak of a chart) and saucers (at the bottom). There are many terms used for this phenomenon. A rounded top, as the name suggests, is price action at the upper end of a chart, and it is sometimes called a distribution top or an inverted saucer. A saucer, which is typically at the low end of a chart's recent price range, is also referred to as a rounded bottom, a basing pattern, or a dish pattern.

Tops and bottoms are not always as clean and neat as saucers and tops, so we will begin by examining the more fundamental price breakouts, which are the progenitors of saucers and tops. A breakout is the escape from a price range bounded by a lower line (support) and an upper line (resistance). Figure 10.1 illustrates a breakout pattern ...