Skip to content
SuperMoney logo
SuperMoney logo

Rounding Bottom Pattern Explained: Definition, How It Works, and Examples

Last updated 11/01/2023 by

Alessandra Nicole

Edited by

Fact checked by

A rounding bottom is a significant chart pattern in technical analysis, signaling a potential reversal from a prolonged downtrend to an upward trend. Traders observe this “U” shaped pattern to anticipate a shift in market sentiment and price movements.

What is a rounding bottom?

A rounding bottom is a chart pattern utilized in technical analysis to indicate a potential reversal in a long-term downtrend. It resembles a “U” shape and generally emerges after a sustained decline in prices. Traders consider this pattern as a signal of a market shift from bearish to bullish trends, typically occurring over weeks to months. Confirmation of this pattern often involves correlated movements between price and trading volume.

How a rounding bottom works

A rounding bottom is akin to the cup and handle pattern but lacks the temporary downward trend of the “handle” section. The initial downward slope indicates an oversupply, causing the stock price to drop. The pattern reverses as buyers enter the market at a low price, boosting demand for the stock. Once the rounding bottom forms completely, the stock breaks out, signaling a new upward trend. This pattern is indicative of a positive market reversal, with investor sentiment shifting from bearish to bullish.

Rounding bottom chart example

The rounding bottom, also known as a saucer bottom, resembles a bowl-like structure. Recovery from the downturn may take considerable time, demanding patience from investors for a full stock price recovery.

Parts of a rounding bottom chart

A rounding bottom chart comprises various sections. The prior trend illustrates the stock’s initial decline towards its low. Typically, trading volume is heaviest at the beginning of the decline, gradually decreasing as the share price stabilizes near the pattern’s bottom. As the stock recovers, volume increases as investors buy shares again. The rounding bottom breaks out when the stock price surpasses the price just before the initial decline.

Volume in rounding bottoms

Ideally, the trading volume in a rounding bottom pattern mirrors the stock price direction but doesn’t always have perfect correlation. Often, trading volumes are at their lowest when the share price reaches its nadir. The volume usually peaks at the start of the decline and reaches another high when the stock approaches its previous peak.
Here is a list of the benefits and the drawbacks to consider.
  • Signals potential market trend reversal
  • Indicates favorable buying opportunities
  • Provides a visual representation of changing market sentiment
  • Pattern confirmation might be subjective and may result in false signals
  • Not all rounding bottoms lead to sustained upward trends
  • Pattern completion might take a considerable time, demanding patience from investors

Frequently asked questions

What other patterns resemble the rounding bottom?

The rounding bottom shares visual similarities with the cup and handle pattern but differs in the presence of the temporary downward trend in the handle section.

What duration does a rounding bottom pattern typically cover?

A rounding bottom pattern can develop over several weeks to months, depending on market conditions and the specific stock.

Is a rounding bottom a guaranteed signal for a market trend reversal?

While a rounding bottom indicates a potential reversal, it doesn’t assure a sustained upward trend; market conditions can vary, resulting in false signals.

Key takeaways

  • A rounding bottom pattern signals a potential reversal from a downtrend to an uptrend.
  • Patience is necessary as the completion of the pattern may take a considerable amount of time.
  • Confirmation of the pattern involves analyzing price movements and correlated volumes.

Share this post:

You might also like