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Cup With Handle Pattern

The most common stock chart pattern is known as the cup with handle pattern.  Learning to recognize this most basic pattern can help traders time a profitable entry into the market, and also know when to avoid losses.

Some of the characteristics of the cup pattern include:

  • Cup patterns can last between 7 to 65 weeks (most are 3-6 months).
  • Usual correction from peak to trough is 12-15%, but as much as 33%.
  • Look for ~30% increase in price in the prior uptrend.
  • Bottom part of cup should be rounded U, not a V, so as to give enough time for a proper amount of time to shake out weak holders and is more likely to produce strong owners unlikely to sell at the next advance.
  • Cup patterns may be 1.5-2.5 times the market average corrections
  • Corrections exceeding 2.5x the average indicates a *weak* pattern that may fail.  Example: JDSU in 2000.
  • Avoid patterns correcting more than 40-50%.  It would take an unlikely 100% gain to recover from a 50% loss.  Statistics show shareholders would most likely unload shares before an 80% gain. Anomoly: Sea Containers 1975 increased +554%

Characteristics of the Handle Area

  • Formation of the handle area can take more than 1-2 weeks.
  • Has a downward price shift, with volume drying up near the lows in the handle’s pullback phase.
  • Cups w/out handles have a higher failure rate, but high momentum stocks can advance without proper formation of the handle.
  • Typically takes place in the upper right 8-12% of the prior gains, and contained above the stock’s 10-week SMA.  Below this point, the pattern is prone to failure.
  • Handles that consistently wedge up tend to fail, because they do not allow the stock to go through the normal “wash out” during a sharp pullback.  This type of trait is often observed in third or fourth-stage bases, which become too obvious and should be avoided.

Find Pivot Points and Watch “Volume Percent Change”

  • Jesse Livermore calls the charge through moment the ‘pivot point’ or ‘line of least resistance’.
  • Volume should increase 40-50% above normal.  Not uncommon for new market leaders to show spikes of 200, 500 or 1000% greater than normal volume.
  • Strong institutional buying causes the big increases in equity price through demanding large volumes of shares.
  • 95% of the general public becomes too scared to purchase stocks at their highest prices; it seems absurd or risky.
  • Begin buying at the right time, when chances for success are greatest.  Learn to wait for a stock to move up and trade at the buy point.  Set up alerts to stay on top of breakout points.
  • Do not buy higher than 5-10% above the price breakout point; you will likely get caught up in the next correction.  Your automatic 8% loss cutting rule will then force you to sell the stock.
  • Price buy points usually occur 5-10% below the prior peak during the handle phase.  If you wait for an actual new price, you will often be caught buying too late.
  • Draw a downtrend line from the pattern’s absolute peak downward across the peak where the stock starts building the handle.  Begin your purchase when the trend line is broken to the upside.

Look for Volume Dry-Ups Near the Price Pattern Lows

  • Interpretation: sellers are exhausted; supply of stock coming into the marketplace is decreasing.
  • Tightness in prices and dried-up volume indicate constructive accumulation in healthy stocks.
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