The daily chart of China Taisan (F2X.SI) shows the end of a downtrend followed by a consolidation, within which a saucer pattern is currently developing. In detail, the downtrend ended in mid October this year with a rebound from the historical low support around 0.085 and a rally through the valid downward trendline. A brief breakout above the 0.102 resistance was not sustained, and prices have since continued to trade between the 1.02 resistance and the low support around 0.085.

Throughout November and December, prices have gradually softened from the top to the bottom of the developing consolidation channel, with a gradual deceleration which is forming a saucer pattern with a pattern lip at 1.02 and a mid-point resistance at 0.093. As a side-note, the pattern is not a true rounded bottom as it has not formed at the bottom of the downtrend, however the treatment of the pattern is similar to a rounded bottom in that it can be treated as a bullish pattern developing within the consolidation channel with associated calculated upside targets. The last day on the chart shows a close just below the mid point resistance at 0.093.

Overall, the stock remains in a consolidation band between 0.085 and 0.102. In general, a rebound from a trading channel support signals a potential opportunity, especially in a trade-able channel such as here. In this case the saucer pattern supports the probability of a breakout to the top of the trading channel, and (if the saucer continues to develop) in the longer-term provides support for a potential breakout above the 1.02 resistance. The upside probability is currently somewhat weakened by the GMMAs, where the long-term group is only just starting to converge into a consolidation pattern and remains well spread, suggesting that a sustained upside development may take some time to develop.

Hence, opportunities are likely best considered on confirmation of the saucer through a breakout above the mid-point resistance at 0.093. At this point, the ongoing development of the pattern would suggest a likely acceleration and potential rally development.

In the longer-term, a breakout above the saucer lip around 0.102 would shift the upside target to the calculated pattern target around 0.12 (set by projecting the depth of the pattern below the pattern lip upward from the pattern lip). Such a breakout would signal an opportunity even outside of the saucer pattern, though a well developed bullish pattern increases the upside probability.

Failure of the curved trendline will end the saucer pattern, and will signal an ongoing consolidation above the 0.085 support. Caution is required when using the curved trendline as a stop-loss, as the curve is generally more open to interpretation than a straightedge trendline, which has the potential to result in looser risk management.

Traders may look for opportunities on a rebound from 0.085, especially if a longer-term trading channel develops which may give rise to repeated channel trading opportunities. In contrast, failure of the 0.085 level will signal significant weakness and a potential downtrend.

The saucer or rounding bottom is a long term chart pattern. It is a very strong reversal signal. The shape of the bottom is best described with an arc rather than with a single trend line. The pattern develops over weeks or months. It is not a short term pattern. There are two price projection methods. The first is the height of the saucer. This is projected upwards to set the targets. Less reliable, but still useful, is the width of the saucer. When this is projected upwards it gives indicative price targets. Confirm this with a point and figure count based on the same pattern. These are much more accurate.

A common feature of the saucer pattern is the development of a handle on the right hand side. This is similar to the cup and handle short term pattern. This handle - a sideways consolidation movement - is a very bullish signal and provides very good entry opportunities.

By Petra Rak