wdbrand1: Cup with handle:
90 days is not the rule. Achieving prior peak is must.
investors.com
Spotting The Cup With Handle
The majority of the greatest stock winners have traced this pattern. As the name implies, the cup with handle pattern resembles the profile of a tea cup with a handle on the right side. The pattern develops after the stock has gone up over a period of time, from point 1 to point 2 in the accompanying graph of Dell Computer.
The pattern begins with a U-shaped formation in which the stock initially drops approximately 20% to 30% from its peak (from point 2 to point 3). (During bear markets, a decline of up to 50% may be a normal part of this chart pattern.) A weak overall market or disappointing news about the company could have triggered the drop.
Volume decreases as the stock goes through the bottoming phase (point 3), indicating the selling wave is dissipating. Volume climbs on days or weeks when the stock closes higher, suggesting that buyers outweigh sellers.
The stock stops climbing at a point roughly equal to the prior peak (point 4). In some instances, the reason is that investors who lost money during the sell-off decide to sell the stock, content to walk away by just breaking even.
This sets off another period of consolidation in which the stock moves sideways and drifts lower again – as much as 12% to 20% in bear (down) markets and generally 8% to 12% during bull (up) markets. This is the “handle” part of the formation (point 4 to point 5). The handle should form in the upper half of the overall pattern. For example, if the cup declines from $50 to $30, the handle should be above the $40 range.
After several weeks (sometimes as little as one week), the stock jumps higher. The buy point, or pivot point, is when the stock price breaks above the prior peak price in the handle area by at least 1/8 of a point (point 6). The pivot is also characterized by a surge in trading volume of at least 50% above the average volume over the past 50 days. This marks an entry of mainly professional investors into the stock. (The importance of professional buying is explained in the lesson, “Sponsorship: Catching The Stocks The Pros Are Buying.”)
After the pivot point in May 1996, Dell's stock gained an astonishing 626% over the next 15 months. Dell, which perfected direct sales of personal computers and grew to be the No. 1 PC maker, had a Relative Price Strength Rating of 92 (top 8% in prior price performance), and its Accumulation/Distribution Rating was B+ (being bought by professional investors). In six of the previous seven quarters, earnings growth was over 50% and sales growth was over 39%. |
