Joe: C&H formation is also one of my favorite patterns to trade from (see earlier post re: hammer patterns). Yes, you seldom find textbook examples, and when you do I haven't found them to be more highly probably to show near-term break-outs than some of the less-than-perfect looking patterns. The aggregate underlying conditions prior to and throughout the formation of the cup (price swings within the cup relative to historic norms, and how the volume correlates to these swings) and then the handle is more important than the pattern itself following a strict shape. I had the same difficulty you're experiencing with interpreting them at first because O'neil's book describes only a textbook pattern, yet the graphical examples in his book show something different. The best way to absorb what's allowable is to study TONS of charts of successful breakouts (not specifically cup w/ handles formations--any successful breakouts). Take tons of notes on the price and volume action prior to the breakout, and eventually you'll develop an intuitive feel for which patterns have been successful in the past, and most importantly "why" it was successful--what was the price and volume action prior to the move saying. The cup with a handle "formation" will become clearer after all this work because it's one of the more frequently successful breakout patterns. But it really does have a high correlation to the types of stocks O'Neil targets. Although I don't follow O'neil's methods to the letter, the parts of his methods--including C&H formations--that I was able to confirm on my own, I do follow.
P.S. adding candlesticks to this method is very beneficial because I can scan candle charts about 3 times faster than bar charts. Since I can't (or haven't anyway) really program a scan that encapsulates all the conditions for a "good" pattern, I do this scan manually on a relatively small universe of stocks that meet a set of fundamental criteria.
Some general C&H info:
The "average" depth of the cup, the length of time the cup forms over, the level the handle forms at, and the handle trendline are (from my experience anyway) more important than just trading tight, geometrically perfect cup/handle formations. The volume action during both is also very important. The pattern serves as a buy set up, and only triggers on a breakout with high volume. It would really take about 10 pages for me to convey most of what I look for with the C&H, so I know this is kind of vague. Hope it helped some though.
Oops, forgot 1 thing. Yes, the handle should follow the cup. There is a logical reason for this, but kind of lengthy, so if you're interested in my take on this, let me know.
dh |
