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The cup-with-handle is a chart pattern that identifies stocks preparing for uptrends. Here are the steps to convert this pattern to a set of rules for screening your stock database to identify likely candidates. The pattern is so named because, when viewing a stock's price chart, it takes roughly the shape of a cup. The price rises to a peak and then falls, forming the left side of the cup. From there, the stock trades sideways for some time, then rises to form the right side of the cup. After the completion of the cup, before the stock breaks out the new highs, the price often hits resistance and pulls back a little. This pullback forms what looks like a handle. The peak at the right side of the cup defines the buy or breakout point, called the "pivot" price. But the price action itself is not sufficient to determine the outcome of a breakout. Big money - that is, institutional money - must be flowing into a stock for a breakout to occur. One of my indicators requires that the volume on the breakout be at least 100% above the 50-day average volume prior to the breakout. Another indication that institutional money is flowing into a stock occurs when a stock's rising days generally have much higher volume than it does on down days. One of the best clues to institutional buying prior to a breakout appears in the price-volume interaction. First, the volume on the rising days on the right-hand side of the cup is much higher than either the volume in the falling days or the 50-day average volume. Then the volume in the falling days of the handle diminishes to well below the volume on the rising days of the right side of the cup. Using such considerations, we were able to include both price and volume requirements in a single algorithm. Let's look at the recent Chart of Amgen Inc. (NYSE: AMGN). It shows highly idealized price-volume chart of the cup-with-handle pattern. There are five main points of the chart, denoted by 1, 2, 3, 4 and 5. The actual pattern is located between points 2 and 5; point 1 denotes the beginning of a setup phase. Starting at 1, the stock price rises, peaking at point 2, defining the top, or left side of the cup. Point 2, near $80, is the highest point on the chart. After peaking at $80, the price drops and begins to build the bottom of the cup, which ends at 3, i.e. $53. After point 3, the price rises on increasing volume, forming the right-hand side of the cup, accompanied by a similar rise in volume. As the price and volume rise together, forming the right side of the cup, and fall together, forming the handle, the price and volume should give the appearance of shadowing each other. Point 4, near $80 again, is the highest point in the right-hand side of the cup, the "pivot" point, completing the cup formation. Then, as the price pulls back on lighter volume, a handle is formed, with the most recent day being point 5, i.e $74. The cup-with-handle pattern is now complete and the buy point will occur when the price breaks above the value at point 2, i.e. $80 on large volume. This is indicated by point 6.
Using a computer program that screens for such patterns provides the user with a list of stocks which charts are the best cup-with-handle candidates on a purely technical basis. I would look to buy a tool box as Trade Station (for example) to help identifying such list of patterns. It is up to the user to research these stocks to determine which have the qualifying fundamental criteria. The user must not buy stocks from the list yet, since many stocks that complete the cup-with-handle setup end up not breaking out. {Recent example was The Home Depot, Inc. (NYSE: HD)}. From point 5, they often roll over, forming the right shoulder of a head-and-shoulders topping pattern and sharply failing to form a cup-with-handle formation. Using this standard, I would ignore any handle that retraces more than 25-30% of the right-side rise. In 1999, with the case with HD, my model had a Sell Signal at $62 1/2 and it worked out perfectly. The stock has been in steady decline to retrace down levels, i.e. $55.
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