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Cardinal Reversal Patterns - At Tops
3. The Rounding Top
The rounding top reflects the market's perception that the
underlying fundamentals driving the prices are changing, but the turn is
markedly slow. Often, the first sign that the market is near the end of
the uptrend is a climatic level of volume (A). However, the news
is still very positive, which brings in new buyers. At this point, the
market will begin to consolidate the recent gains (B). This corrective
process can take on many forms, but the key issue is that the volume will
recede as the consolidation unfolds. This lack of volume indicates that
the uptrend is still intact, as there is a lack of profit-taking.
It is at this point that the market will begin to advance,
but the high volume seen in the recent rallies is absent. There is a continued
trend of increased volume during the advances and lighter volume during
the sideways price action, but with each advance, there will be less and
less volume. The volume chart (C) will often be a mirror image of
the price action. New price peaks are accompanied with lower peaks in volume.
At some point, the market peaks and begins to falter. As the market begins
to roll over, there should be a support line established under the last
consolidation (D). The break of this trendline, with heavy volume,
is the signal that the rounding top is complete.
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