The rounding top, also known as a saucer top or inverse saucer, is a long-term bearish reversal pattern that signals a gradual shift from buying pressure to selling pressure. This pattern indicates that an uptrend is losing momentum and a downtrend may follow. Recognizing it early can help you protect profits and position for the decline.
What is a Rounding Top Pattern?
The rounding top is a reversal pattern that forms after an uptrend:
- Shape: Resembles an inverted bowl or upside-down saucer
- Duration: Typically takes weeks to months to form
- Neckline: Horizontal support level at the pattern's troughs
- Breakdown: Price closes below the neckline to confirm the pattern
Key concept: The rounding top represents a gradual transition from bullish to bearish sentiment. Smart money slowly distributes shares to retail investors. The gradual nature of this pattern often precedes extended downtrends as buyers eventually exhaust themselves.
Pattern Identification Rules
Look for these characteristics when identifying a rounding top:
1. Prior Uptrend
- Price must be in a clear uptrend before the pattern forms
- The rally should be significant (at least 15-20%)
- Buying momentum should gradually decrease
2. Left Side of the Dome
- Price rises at a decreasing rate
- Volume typically decreases as buying enthusiasm fades
- Candles get smaller as upward momentum slows
3. Top of the Dome
- Price moves sideways with small price ranges
- Multiple attempts to break higher fail
- This phase can last several weeks
4. Right Side of the Dome
- Price begins declining at an increasing rate
- Volume may increase as selling pressure builds
- Lower highs become evident
Rounding Top Example
Stock ABC rises from $50 to $80 over three months as buying slows.
Price tops around $78-80 for six weeks, unable to make new highs.
Price gradually falls back toward $65 over two months with increasing selling.
Neckline at $65 (previous support). Breakdown below $65 confirms the pattern.
Target: $50 (the height of $15 subtracted from the neckline of $65).
Trading the Rounding Top
Entry Strategies
- Breakdown entry: Short when price closes below the neckline
- Pullback entry: Short on a retest of the neckline as resistance
- Options: Buy puts when the right side begins forming
Stop Loss Placement
- Conservative: Above the top of the dome
- Moderate: Above the most recent swing high
- Aggressive: Above the neckline (after breakdown)
Profit Targets
- Measured move: Subtract the pattern height from the neckline
- Example: If height is $15 and neckline is $65, target is $50
- Consider covering partial shorts at 50% of the target
- Use trailing stops to capture extended moves
Volume Analysis
Volume patterns help confirm the rounding top:
- Left side: Decreasing volume as buying exhausts
- Top: Low or erratic volume indicating indecision
- Right side: Increasing volume as distribution occurs
- Breakdown: Volume spike confirms genuine selling pressure
Distribution Signals
Watch for signs of institutional distribution:
- High volume days that close near lows
- Gaps down that do not fill
- Rallies on declining volume
- Multiple failed breakout attempts
- Increasing short interest
Timeframe Considerations
The rounding top appears on various timeframes:
- Weekly charts: Major reversals, multi-month declines
- Daily charts: Swing trade setups, weeks to months
- 4-hour charts: Shorter-term reversals, days to weeks
- Longer timeframes typically produce more significant moves
Protective Strategies for Long Holders
If you own a stock forming a rounding top:
- Tighten stop losses as pattern develops
- Reduce position size on the right side
- Buy protective puts as insurance
- Set alerts for neckline breakdown
- Exit remaining position on breakdown
Common Mistakes to Avoid
- Shorting too early: Wait for breakdown confirmation
- Ignoring the larger trend: Bull markets can absorb many rounding tops
- Wrong pattern shape: The top should be rounded, not sharp
- Support below: Check for major support below neckline
- Impatience: This pattern takes time to develop fully
Pattern Failure Signs
Watch for these warning signs of potential failure:
- Price breaks above the top of the dome
- Volume surges on bullish days near the top
- Neckline holds after multiple tests
- Breakdown quickly reverses (bull trap)
- Breakdown occurs on low volume
Rounding Top vs Double Top
Both are bearish reversal patterns with key differences:
- Rounding top: Gradual curve, longer formation time
- Double top: Two distinct peaks, faster formation
- Rounding top shows gradual sentiment shift
- Double top shows rejection at specific price level
- Both use neckline breakdowns for entries
Best Market Conditions
The rounding top is more reliable when:
- Overall market is showing weakness
- Sector is underperforming
- Company fundamentals are deteriorating
- Interest rates are rising
- Economic indicators are weakening
Combining with Other Analysis
Strengthen your rounding top trades with:
- Fundamental analysis: Declining earnings or revenue
- Sector analysis: Sector showing relative weakness
- Moving averages: Price crossing below 50 and 200-day MAs
- RSI: Falling from overbought, crossing below 50
Protect Your Portfolio
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Summary
The rounding top is a reliable long-term bearish reversal pattern that forms when an uptrend gradually transitions to a downtrend. Look for the characteristic dome shape with decreasing volume on the left, low volume at the top, and increasing volume on the right. Enter short on the neckline breakdown with stops above recent highs. The measured move target equals the pattern height subtracted from the neckline. This pattern provides excellent opportunities for both shorting and protecting existing long positions.
Learn more: Rounding Bottom Pattern and What is a Bear Market.