Rounding Top: What It Is and How It's Used

What Is a Rounding Top?

A rounding top is a price pattern used in technical analysis. It is identified by daily price movements, particularly the tops, which form a downward-sloping curve when graphed. A rounding top may form at the end of an extended upward trend, and this price pattern may indicate a reversal in the long-term price movement.

The rounding top pattern can develop over several days, or even years, with time frames to completion forecasting an extended change in trend. It may be contrasted with a rounding bottom.

What It Tells Investors

A rounding top pattern is similar to that of an inverse saucer pattern. It may occur with a double-top or triple-top price pattern. Investors who recognize the rounding top anticipate a change in trend from upward-trending prices to downward-trending prices.

The price of a security will increase to a new high, then steadily decrease from a resistance level to form the rounding top. Volumes will usually be the highest when the price is increasing and may experience another high on the downtrend during the selloff phase.

Seeing the change allows traders to take profits, protect themselves from buying into an unfavorable market, or strategize to make money from falling prices by short-selling. A rounding top may represent a bearish future outlook for a stock.

Components of a Rounding Top

• A rounding shape where prices trend higher, taper off, and trend lower
• An inverted volume pattern with a high on either end but a lower in the middle
• The support price level is found at the base of the pattern.

Rounding Top vs. Double Top

If a rounding top series chart does not lead to a reversal, it may revert to previous highs. If, at those highs, it meets resistance again, it is likely to form a double top. In a double-top pattern, a security’s price will show two consecutive upside-down U-shapes. In these scenarios, investors are not bearish and still believe that the security’s price could remain at peak levels.

A double top of two rounding tops is likely a bearish indicator because buyers have tried twice and failed to see their expectations for higher prices achieved. This pattern forms when investors resist a bearish trend, and when they no longer resist and begin to exit the pattern, they may do so rapidly. Generally, this pattern, like a rounding top, will indicate the end of a bullish trend.

The Bottom Line

Used in technical analysis, a rounding top is a chart pattern showing price movements that form an upside-down "U" when graphed. Rounding tops occur at the end of an extended upward trend and may signify a reversal in long-term price movements.