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Investopedia Academy - Technical Analysis - Lesson 8.6 - Reversal Pattern - Rounding Top-Bottom - YouTube
Channel: Mike's Trading Channel
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So one of the common themes that we're talking聽
about with reversal patterns is that they're not聽聽
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an event it's a process that takes time a head and聽
shoulders top that needs to be very symmetrical聽聽
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with both height and time it goes through a聽
process of topping there are multiple tops聽聽
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multiple tests of support until that ultimate聽
break the bigger the top the more important聽聽
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that topping pattern is the larger the bottom the聽
more important that bottoming process is so we're聽聽
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going to talk about something that is very similar聽
to a head and shoulders pattern just as rare as a聽聽
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head and shoulders pattern takes just as long to聽
develop as a head and shoulders pattern but is not聽聽
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as clearly defined with two shoulders and a head聽
and is more of a saucer bottom like a saucer pan聽聽
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is traditionally what it's called more of a聽
rounding bottom so let's take a look at it here聽聽
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the prerequisite for a rounding bottom of course聽
is that you need a former decline in the market聽聽
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you need something that can bottom out so that's聽
the first thing that we need and then we need聽聽
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some time just some consolidation to allow the uh聽
the longs to just throw in the towel just because聽聽
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they just can't stand being something that's not聽
moving even the shorts are frustrated nobody in a聽聽
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sideways saucer pattern is happy nobody's making聽
money the bulls are frustrated the bears are聽聽
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frustrated and from that sort of indecision is聽
what starts a new trend so the old saying is that聽聽
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the bigger the base the higher in space that comes聽
from legendary technician Alan Shaw who suggested聽聽
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that the longer that these patterns take place聽
the bigger the eventual resolution and the more聽聽
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powerful it can be this saucer pattern was defined聽
by Edwards and McGee in their book in 1948.聽聽
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these days the nickname is the Kardashian bottom a聽
much more larger rounding base and the bigger that聽聽
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bottom the more explosive that resolution is聽
going to be these saucer patterns or rounding聽聽
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bottoms that take a long time to develop and聽
eventually have an explosive upside resolution聽聽
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we could see the same thing with tops and again聽
just want to reiterate these are very rare we聽聽
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don't want to wake up in the morning constantly聽
looking for topping patterns we want to look for聽聽
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markets that are trending look to enter after聽
continuation patterns are complete but i do聽聽
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think it's important to be aware when something of聽
serious magnitude is putting in a major major top聽聽
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or in many cases when you start ripping through聽
charts and you start going through hundreds and聽聽
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hundreds of charts and you start to see聽
a common theme of many topping patterns聽聽
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that's very characteristic of stock market tops聽
so let's take a look at an example right now聽聽
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this is uh one of the most classic famous examples聽
of the rounding top this is the financial sector聽聽
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relative to the S&P 500 so in other words聽
the relative line for u.s banks it is the XLF聽聽
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relative to the spy so financials versus聽
SMPs we have the prerequisite of course the聽聽
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prior uptrend in place you need something聽
to top obviously higher lows higher highs聽聽
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and then here's that period of frustration just聽
the bulls are frustrated they're angry the bears聽聽
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are frustrated they're angry and from a prolonged聽
period of indecision sparks a major new trend聽聽
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the old saying is the larger the top the聽
larger the drop here's your massive top聽聽
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and then here's your crash the 2008 crash in聽
financials in the united states was obviously聽聽
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a famous crash we're going to be talking about聽
this 50 hundred years from now but the topping聽聽
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pattern that came before that is what caused this聽
mess you had plenty of opportunity to escape this聽聽
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disaster simply by looking for the top so聽
the bigger it is the worst the implications.
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