What is a saucer?
A saucer, also referred to as a rounded bottom, refers to a technical chart pattern that signals a potential reversal in a security’s price. It is formed when the price of that security has reached a low and begins to rise.
Key points to remember
- A saucer, or rounded bottom, is a graphical pattern used in technical analysis and is identified by a series of price movements that graphically form the shape of a “U”.
- Envelope channels and standard trading channels are important models for a trader when looking to identify and place profitable trades from a saucer formation.
- Typically, traders will want to buy the stock or buy call options on the stock at its lowest price in order to get the greatest profit from an uptrend saucer pattern.
Understanding the saucers
Saucers typically form at the support levels of a security, whether they are trend lines, channels, or any other metric that defines the supply / demand relationship of that security. They occur when a financial instrument drops to a low level and then begins to rise. This price action results in a “U” shaped graphic figure and is usually very rounded with a flat bottom.
Rounded lows are found at the end of prolonged downtrends and signify a reversal of long-term price movements. The lead time for this pattern can vary from several weeks to several months and is considered by many traders to be a rare occurrence. Ideally, volume and price will move in tandem, with volume confirming price action.
Some key elements for saucer models include:
- A prior price trend, in this case downward, must exist.
- The price drop should bottom out, begin a consolidation phase that shifts momentum from bearish to bullish, before reversing price and exiting above the neckline.
- The neckline of the saucer can be identified by the price just before the rounding pattern begins to form, and is validated when the price reverses up to that point.
- Volume can be an important indicator of potential saucer formation since it will typically be lower when the pattern trough is reached.
- While there is no theoretical price target for going up, some techs have recommended taking the depth of the U, halving it, and adding it to the neckline.
Traders can use a variety of different channels to plot resistance and support trend lines around the price of a security. Envelope channel patterns are fluid formations that can help track the course of a title over long periods of time. A Bollinger Band channel is one of the most commonly used envelope channels. This channel draws resistance and support trend lines two standard deviations above and below the moving average. Various other envelope channels with different methodologies for drawing trend lines also exist, including Keltner channels and Donchian channels.
Traders looking for tighter resistance and support trend lines can also draw channels at the highs and lows of a security’s price over a period of time. These channels will be either ascending, descending or sideways depending on the price trend of the security.
Saucer Trading Signals
Envelope channels and standard trading channels are important models for a trader when looking to identify and place profitable trades from a saucer formation. A saucer usually forms at the support trend line. This can come from a massive sale with high volume which brings the price down to its lowest point. Often times, this low price point will be in the support zone, which is an area around the support trend line.
In the support zone, there is often great price uncertainty. The support area is known to serve as a safety floor and therefore it is expected that the price will not fall below this level. However, the trading mechanisms, supply and demand, are all factored into the price of the security and may cause the price to continue to fall below the support level. Volume can often be an important indicator at this point, as it is heavily influenced by investor price sentiment.
If the price does not tend to fall and starts an uptrend, then a saucer occurs. This is the most anticipated move and it follows the traditional investment methodology. Typically, traders will want to buy the stock or buy call options on the stock at its lowest price in order to reap the benefits of a saucer model.