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CUP, SAUCER AND ROUNDING BOTTOM TARGETS

By Daryl Guppy

Trading chart patterns forms the basis of chart analysis and can be very successful. When trading high probability patterns we must remember they are not 100% guaranteed. We must have our trading plan and stop loss in place even when the probability of success is on our side.

A cup pattern has a distinctive shape making it easy to spot when trolling our charts. It generally starts around a point of resistance and develops over several weeks. Prices fall and rise following a curved trendline until it has reached the original resistance level. Once this resistance level has been reached there is a 70% to 75% chance the price will breakout above this resistance level completing the pattern. If a pattern is developing over a longer period it is a rounding bottom or saucer pattern.

A rounding bottom is another reversal pattern and is more significant as it is a leading indication of a major trend change. A cup pattern is a more short term pattern. In a cup pattern we measure the distance between the base of the curve and the rim. We then project this up from the rim and we have our breakout target.

 

The PPX chart demonstrates how a cup pattern behaves when the breakout is successful. This is not a perfect example because price does not often test the right hand side of the curved cup trend line. However this is a real trading example. PPX had been in a well entrenched down trend prior to the development of the chart pattern falling from $4.10 in mid 2007 to $2.00 in early February 2008. Once price had fallen and started to follow the curved trendline it reached the resistance level at $2.45 and a breakout occurred. Price took six days to reach the pattern target. In many cases cup pattern breakouts pull back either to the resistance level or fall through it after they have reached their target price. Once a cup pattern has reached its target traders should be out of the trade. When trading patterns after the price has hit its target all bets are off on whether price will continue to rise or fall. There is no probability greater either way.

The saucer or rounding bottom chart pattern is similar to the cup but it takes a much longer period to develop. This pattern usually develops after a strong trend collapse. It may take 3 to 6 months or longer to develop. The breakout behavior is similar to that seen on a cup pattern. The calculation of upside targets is achieved in the same way. The upper edge of the saucer pattern is established. The distance between this rim and the lower edge of the pattern is measured. This is projected upwards to set the target for the breakout. The important difference with the saucer pattern is that it is a trend continuation pattern. Once the breakout target has been achieved there is a higher probability the new uptrend will continue. Pullbacks are minor with a higher balance of probability of up trend continuation.
 


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