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High-Probability Trade Setups: A Chartist's Guide to Real-Time Trading by Tim Knight

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Chapter 19

Rounded Bottoms

Probably the simplest, cleanest, and easiest-to-identify pattern in technical analysis is the rounded bottom (also called the saucer bottom). As the name suggests, this pattern indicates the price action has a curve at the bottom of a price decline, setting up for a reversal to the upside. Some of the most powerful and long-lasting price movements take place after a rounded bottom, and they usually represent relatively safe trades since the market has spent so much time hammering out a bottom and clearing bears and nervous holders out of the security.

DEFINITION OF THE PATTERN

At the risk of oversimplifying, the definition of a rounded bottom is a price pattern that gradually decreases in price, stabilizes for a while, gradually increases in price, and then finally breaks above resistance on strong volume. Figure 19.1 provides an example with the security RAX (Rackspace Hosting, Inc.). The price slowly moved from about $22 to $16 over a period of half a year, then reversed and started slowly moving higher. In September, the stock overcame resistance at the $22 level on strong volume and went on to a 50 percent price gain over the coming several months.

This example shows the two core elements of this kind of pattern—a clean, well-defined base that resembles a relatively smooth saucer, and a “punching through” of the price on hearty volume. This volume surge affirms renewed interest in the stock, since all recent buyers are now enjoying a profitable position. ...

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