Stocks often top out or bottom out without us realizing it. To the observant, it is very clear to them that a stock is bottoming or topping. But there are different kinds of tops and bottom and today let us look at the rounded ones.
Rounded tops and bottoms are formed over a longer period of time compared to V shape tops or bottoms. Therefore, there will be more market participants who will be involved in the process of forming a rounded top or bottom. Because more trading has occurred, naturally there will be more congestion and thus the rounded top will act as a great resistance and the rounded bottom will act as a great support for a stock.
As you can see from the chart above, AAL formed a weekly rounded bottom which eventually acted as a very strong resistance which kept the stock from rising. Rounded tops have a lot of congestion and therefore there have been a lot of people who have bought the stock. All those congestion areas need to be absorbed.
If it is a V top, the supply or resistance is easily absorbed but because the rounded top has lots of areas of congestion, then there needs to be a lot of effort to absorb the supply. So one should not expect rounded tops to be easily overcome.
Can you see how the rounded top in the weekly chart of Apple made it so difficult for Apple to make a new high until recently. Rounded tops are notorious in making it difficult for people to make money in the stock. AAPL had to rally a few times in the weekly chart to start to absorbed the supply (people who lost money) at the rounded top. It was in the fourth rally that it was able to overcome the old highs and make a new high.
So the next time you see a stock having a weekly rounded top, don't expect the stock to be able to overcome the rounded top so easily. It will probably take many attempts for it to be able to go above the old highs.
If rounded tops can be very good resistance areas that keep stocks from rising, a rounded bottom has equal power to keep a stock from dropping. In fact the wider and longer the rounded bottom is, the more support it has for the stock in the future.
In the chart above, you can see that AEP had a bear market towards the end of 2016. The stock kept on dropping until it met the rounded bottom. The area acted as a super strong support which kept AEP from dropping. In fact it worked so well that the stock immediately shot higher after that.
What if there is a rounded bottom and a rounded top in a stock at the same time? Well just have a look at the chart of AES. The stock formed a rounded top and it subsequently formed a rounded bottom. As we all know rounded tops and rounded bottom work very well as strong support and resistance areas.
So what does a stock do when there is strong support below and strong resistance overhead? Well, it trades sideways not knowing where to go until a winner emerges. Just look at how long the stock traded sideways locking in investors money for a very very long time. They could have put the money into some uptrending stocks to make money.
A rounded top in the weekly charts spells a very bad future for the stock. If there is a huge rounded top in the stock, it can tell us that the stock is going to have a hard time moving up in the near future. Take a look at the stock chart of AGN above. I wouldn't want to touch this stock at the moment. Better to choose some nice uptrending stock with little resistance overhead.
Do you now see the power of rounded tops and rounded bottoms? The next time you see a stock drop to a rounded bottom, perhaps there may be some strong support there. On the other hand, if you see your stock rise to a weekly rounded top, then perhaps you should lighten your position.
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