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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