PART 3 OF 3:
None of the impatient, weak holders is willing to bail before they have at least some profit (in other words, their expectations just changed from "get out even" to "get out at a slight profit" because of the recent strength of the stock. * They have already given up though-the majority of their holding time has been at a loss-and the great potential they saw to cause them to buy in near the peak has now dissipated because of this. They WILL bail just as soon as they have a little profit. Since a "little" profit varies from investor to investor, and everybody's sell psychology is different, this selloff of weak holders occurs over a period of a couple weeks-just until they are all shaken out. This forms the handle. The price doesn't decline much because there are buyers that see the potential of this company, have seen it recover from its low of a couple weeks ago, and are waiting for this stock to show some life. They wanted to see it break into new high ground though, before they bought it. They all enter at slightly different times, and approximately offset the sellers. In general, though, you'd like to see the volume dry up during the handle to indicate that there's no more selling interest, and no more buying interest either-that is, until the stock shows some life again and breaks out from the handle. This is important because it indicates a general consensus that the stock is fairly valued at this level (i.e. there is strong support at this level). The folks that now see the potential of this stock (they didn't before for any number of reasons) are the folks that drive the breakout from the handle on high volume. They are waiting to pounce in large numbers (of shares-not necessarly large numbers of investors) when they see signs of strength. Generally the handle is more constructive if there is a slight downward bias or concave shape to it. The daily price ranges should be very small during the low volume days, and should be fairly small for all down days. The total decline of the handle should generally be less than about 10%. The breakout from the handle on strong volume is the buy point. A confirmation day is not required due to the high probability of this pattern.
To (try and) answer your main question, a handle LEADING to the cup is less positive because the expectations of the investors are progressing through two downward stages (following the same arguments presented above), as opposed to the handle following the cup where expectations are progressing through two upward stages. Although a handle/cup/handle pattern could in fact be a head-and-shoulders bottom formation, head-and-shoulders bottoms very seldom form off the initial IPO run because they generally need large groups of holders with common expectations to "give up" at about the same time (making the left shoulder distinct), then another (larger) group to "give up" after the left shoulder shows a little recovery rally, which leads to the deeper drop into the head, then another group needs to "give up" after the head rallies from its bottom. Such groupings generally only exist if the stock has traversed some price areas multiple times, or the stock had several instances of accumulation at a relatively constant price level.
*All of us have done this (and hopefully learned from it)-you have a sell point in mind, the stock almost hits it, then declines (and you wish you had sold anyway-20/20), then trades sideways for a while, then increases back near your prior sell point. Except now, because of the recent strength, you start to think about raising your sell point (a few weeks earlier, you wished it was a little lower). The stock never reaches your raised sell point because it would have to break through resistance, then declines again, and you're left high-and-dry (because you won't sell for a loss-despite the fact that your cash is more likely to make up your loss, and in a shorter time, if you reallocate those funds into a stock which is currently strong).
Hope this was helpful. Any comments welcome.
DH |
