Rounded Reversal

Apr 27, 2009: 11:19 PM CST

The “Rounded Reversal” Pattern occurs most frequently on the Intraday Charts but it can also provide excellent trading opportunities on higher timeframes.

The Rounded Reversal is similar to the classic “Saucer Top and Bottom” chart pattern, both of which are trend reversal patterns that occur at tops and bottoms.

In this example, Sears Holdings (SHLD) formed an ideal “Rounded Reversal” Pattern on January 21st, 2009 into the 2:00pm lows on its 5-minute intraday chart, giving nimble traders an excellent opportunity.

Rounded Reversal Example in SHLD

A Rounded Reversal – in this case – occurs after a downtrend in price as price begins to consolidate at the lows.  Often, one can draw an arc around price into the lows as price finds support and then gently begins to rise at the same angle as it declined, forming a Saucer Bottom or symmetrical price arc.

The hallmark of a “Rounded Reversal” bullish pattern is a Positive Momentum Divergence into the new price lows as price begins its initial arc to the upside.  In this case and many others, price will form a doji or other reversal candle pattern on the lows combined with a positive momentum divergence.

How to Trade a Rounded Reversal

In this case, we will describe an example like the SHLD chart which represents a Bullish Rounded Reversal.  Observe price as being in a downtrend and making new lows, but notice that price seems to consolidate or ‘arc’ at the lows.  If price begins a gentle ‘mirror image’ swing off these lows, chances are that price is forming a simple Rounded Reversal Pattern and that you are witnessing the price lows in the making.

Increase your confidence of trading this pattern by observing a Positive Momentum Divergence with the price lows and try to confirm this development with a higher timeframe support area or accompanying reversal candle.

Enter as close as you can to the suspected price lows as price begins to swing back to the upside and place your stop beneath the price lows formed on the most recent downswing.

A Rounded Reversal does not have a built-in price measuring objective, as it is a trend reversal pattern, and traders have found success using Trailing Stops to capture the full reversal these patterns can deliver.

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