A Rounded Top is considered a bearish signal, indicating a possible reversal of the current uptrend to a new downtrend. Important Characteristics.
Following are important characteristic to look for in a Rounded Top.
Robert D. Edwards and John Magee describe the rounded top as being a "gradual, progressive, and fairly symmetrical change in the trend direction, produced by a gradual shift in the balance between buying and selling". For a rounded top, the price can fluctuate or be linear. However, the overall curve should be smooth and regular, without obvious spikes.
Volume can fluctuate, however volume generally appears to be concave, and follows the inverse of the price pattern. Therefore, as the price begins to ascend, volume tends to decrease. Once the top of the price pattern starts its downward turn, volume tends to increase.
As Martin J. Pring writes in his book, Technical Analysis Explained, "The tip-off to the bearish implication of the rounded top is the fact that volume shrinks as prices reach their highest levels and then expand as they fall."
Duration of the Rounded Top :
Rounded Tops typically occur over a period of about 3 weeks, but can also be observed over several years. Trading Considerations.
Duration of the Pattern :
The duration of the pattern indicates the significance of the price movement. Clifford Pistolese writes, "a rounding top that is completed in a couple of months will usually be less significant than one that takes a much longer time to complete."