Joe: part 1 OF 3. I've never seen a description of the sentiment behind a cup with a handle formation. In fact, the only mention I've ever seen of its significance is in O'Neil's book, and that is far from lucid. After writing this, however, I can see why. It's a pretty tough thing to describe clearly-even in the textbook case. I just want to emphasize that the following description is just my interpretation after studying zillions of charts. Every statement is just my opinion, but to emphasize that after each statement I make would get old in a hurry. So I do it just once here at the beginning. Please bear with my long-winded explanation. A paragraph or two just left too many unanswered questions. I tried to make my interpretation as clear as possible, and hope that I succeeded.
The cup with a handle pattern has its best predictive power for emerging growth companies after they have made their first solid price run since their IPO, and have some institutional sponsorship (in other words, some big money has already recognized their potential). All future cup-with-handle formations that show up in the price plot start to loose their significance, especially beyond the third one. Since "emerging growth" is kind of open to interpretation, it means companies that are beyond their embryonic phase, and have real earnings, real products, and are growing at rates in excess of the market averages. In general, the expectations for growth in the basic fundamental measures (top and bottom line growth) exceed that of the general market-usually by a wide margin. This is an important distinction because a cup with a handle pattern that forms during the more mature stages of a company's existence is less likely to complete with the desired result (a large, sustained breakout to the upside) simply because the expectations for a continued acceleration in growth rates has lessened, and therefore so has the price appreciation potential.
END PART 1
DH |
