Rounding Bottoms Excite Young Bulls

05/12/03 04:10:34 PM

by Matt Blackman

Rounding or saucer bottoms are relatively rare but when they show up in any number, the bulls get excited.

Security: ASKJ
Position: N/A

Like the flowers that bloom in May, rounding bottoms are a good sign that the bear winter is at least temporarily over and a new bullish spring is in the wind. A number of technology and Internet companies have been showing this pattern of late.

Figure 1 � Weekly chart of Ask Jeeves (ASKJ) between August 2000 and May 2003 showing a classic rounding or saucer bottom. When accompanied by a similar rounded bottom volume pattern with volume diminishing into the middle of the pattern and then slowly but surely building, it confirms the pattern. A volume breakout at the end of the pattern, as is the case with ASKJ, is even more bullish.

Graphic provided by: MetaStock.

Rounding patterns can be reversal patterns, as appears to be the case above, or consolidation patterns and take from as little as three weeks to as long as several years to form, according to Martin Pring. Generally, the longer it takes to form, the more reliable the signal. Both tops and bottoms are accompanied by similar bowl-shaped diminishing then increasing volume patterns.

From a market psychology standpoint, the bottoming pattern represents gradual falling interest in the equity in the early stages followed by an extended period of slow but quiet accumulation then a final breakout as more market participants become aware of increasing interest in it.

Due to the rounding shape, it is difficult to draw trendlines to generate a buy signal but in the example above, there is major resistance at the $10 level. A break above this with volume would be significant and represent a logical buying point, assuming the market continues its upward trajectory.

SUGGESTED READING:

Pring, Martin [2002]. Technical Analysis Explained, McGraw-Hill.

Matt Blackman

Matt Blackman is a full-time technical and financial writer and trader. He produces corporate and financial newsletters, and assists clients in getting published in the mainstream media. He is the host of TradeSystemGuru.com. Matt has earned the Chartered Market Technician (CMT) designation. Find out what stocks and futures Matt is watching on Twitter at www.twitter.com/RatioTrade

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