This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Spotting This Stock Chart Pattern Could Make You a Lot of Money

NEW YORK (TheStreet) -- One of my favorite chart patterns is called the rounded-bottom breakout. The pattern was introduced to me by candlestick analyst Rick Saddler, who also coined the term "rounded-bottom 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 20-day simple moving average, the 34-day exponential moving average, 50-day simple moving average and the 200-day simple moving average.

Once you have these moving averages on your chart, the breakout is very easy to spot. I also plot the 8-day exponential moving average, or t-line. The t-line isn't needed to spot the breakout, but it is useful in choosing an exit point once you are in a trade.

Apple Will Murder Microsoft and Bury It With BlackBerry's Corpse

Alaska Analysts on Delta Intrusion: 'What, Us Worry?'

Nintendo Should Scrap the Wii U

Here are the criteria for the rounded-bottom breakout:

  1. The chart needs to be a downtrend, and the longer the downtrend, the better. The 20-day SMA is below the 34-day EMA, which is below the 50-day 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 50-day SMA, thereby causing the 20-day SMA, the 34-day EMA, and the 50-day 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 20-day SMA and the 34-day EMA cross above the 50-day SMA. Usually the price is first to close above the 50-day SMA.
  4. The breakout occurs when there is confirmation of a trend reversal, a price close above the 50-day simple moving average, and when the 20-day SMA and the 34-day EMA cross over the 50-day SMA.
  5. Ideally, you want the price action and the 50-day 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 rounded-bottom breakout is the 200-day 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 200-day SMA is the best target. In a chart that is in a long-term downtrend, you may want to look for a lower target, such as strong resistance levels that occur before the 200-day SMA.

1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
AAPL $118.30 0.42%
FB $104.24 -1.15%
GOOG $742.60 -1.02%
TSLA $230.26 -0.58%
YHOO $33.81 2.64%


Chart of I:DJI
DOW 17,719.92 -78.57 -0.44%
S&P 500 2,080.41 -9.70 -0.46%
NASDAQ 5,108.6660 -18.8590 -0.37%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs