Spotting This Stock Chart Pattern Could

Make You a Lot of Money

Aaron Burt Jul 21, 2014 9:22 AM EDT

NEW YORK (TheStreet) ­­ One of my favorite chart patterns is called the rounded­bottom
breakout. The pattern was introduced to me by candlestick analyst Rick Saddler, who also
coined the term "rounded­bottom breakout." Rick also defined the criteria for the breakout.
Once you know what to look for, it is very easy to spot and can be entered into any chart
software scanner.

In order to find such a pattern in your charts, plot them with the 20­day simple moving
average, the 34­day exponential moving average, 50­day simple moving average and the
200­day simple moving average.
Once you have these moving averages on your chart, the breakout is very easy to spot. I
also plot the 8­day exponential moving average, or t­line. The t­line isn't needed to spot the
breakout, but it is useful in choosing an exit point once you are in a trade.

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Here are the criteria for the rounded­bottom breakout:

1. The chart needs to be a downtrend, and the longer the downtrend, the better. The 20­day
SMA is below the 34­day EMA, which is below the 50­day SMA, which is below the 200­
day SMA. This is a clear downtrend.

2. There should be a bottom formed, such that the chart is trading sideways, forms a double
bottom, and has clearly reached its low. Then you want the price action to come above the
50­day SMA, thereby causing the 20­day SMA, the 34­day EMA, and the 50­day SMA to
cross over to be on top of each other from being below each other.

3. The actual trigger is when the stock price, the 20­day SMA and the 34­day EMA cross
above the 50­day SMA. Usually the price is first to close above the 50­day SMA.

4. The breakout occurs when there is confirmation of a trend reversal, a price close above
the 50­day simple moving average, and when the 20­day SMA and the 34­day EMA cross
over the 50­day SMA.

5. Ideally, you want the price action and the 50­day SMA to be at least 10% below the 200­
day SMA. The larger the percentage below the 200 SMA, the greater the gain potential.
This will occur in a solid downtrend.

6. The main target in a rounded­bottom breakout is the 200­day simple moving average,
since that is likely the next resistance level. There may be a more compelling target,
depending on the individual chart, but in most cases the 200­day SMA is the best target.
In a chart that is in a long­term downtrend, you may want to look for a lower target, such
as strong resistance levels that occur before the 200­day SMA.
The rounded­bottom breakout is a series of events. First there is a downtrend. Then there is a bottom
formed. At the bottom, there is usually consolidation, from a few days to several months and sometimes
the chart will form a double/triple bottom, retesting the bottom. During the consolidation phase, the
moving averages start to crunch together, then they start to cross over each other, as a new trend is
forming.

A good entry point is when the 34­day EMA crosses over the 50­day SMA, but because the moving
averages are lagging, this entry point may come too late for the trade. The best entry is based on your
own trading techniques and your own trading plan, so know your plan and stick to it. I like to enter when
the price closes above the 50­day simple moving average. Then I set a stop just below the 50­day
simple moving. However, all the pieces of a chart need to be considered, as these are guidelines and
should be adjusted depending on your own risk tolerance.

For TC2000 users, here is the input for the scan, so you can watch for it yourself: ABS(C ­ AVGC200) /
C > .10 AND C < AVGC200 AND C > AVGC50

For Think or Swim users, here is the scan to put into the ThinkScript editor: SimpleMovingAvg() is less
than MovAvgExponential("length" = 34) and MovAvgExponential("length" = 34) is less than
SimpleMovingAvg("length" = 50) and SimpleMovingAvg("length" = 50) is less than
SimpleMovingAvg("length" = 200) and close is greater than SimpleMovingAvg("length" = 50)scan

As with all chart patterns and signals, there needs to be confirmation of a trend reversal, and the
rounded­ bottom breakout is no different. Confirmation comes when there are several days of trading
above the 50­day simple moving average, and the uptrend is established.

Here is the perfect example of the rounded­bottom breakout's potential. The Company is Halcon
Resources (HK).

At the time of publication, Burt had no positions in stocks mentioned.