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Cups With Handle
This is a well-known chart formation in which the stock's price action forms what looks
like a cup or bowl or saucer shape with a handle on the right-hand side.
The left side of the cup occurs as a stock is declining and correcting from
a previous uptrend. Eventually the stock stabilizes, forming the bottom of
the cup and then the stock's price rises again, forming the right side. The
handle forms as the stock's price comes close to its original high of the
left lip of the cup. This handle is a price consolidation, representing
remaining pessimism in the stock, mainly from people who had bought high in the
uptrend prior to the cup and at the top of the cup's left side.
Ideally, the handle should have a downward drift and have the volume
drying up, indicating a lack of any more sellers and pessimism. This is
the springboard for a breakout in heavy volume, with the price surging above
the top of the handle (called the pivot point) and continuing on to new
52-week highs.
The ADX Value of a stock is taken into account
before adding it to the Cups-With-Handle screen. Only stocks with an
ADX Value of 30 or less are included. This is to narrow down the choices
to stocks that are not too overheated in their upward momentum. Again, you want
to find stocks that are consolidating sideways or slightly downward.
The best Cups-With-Handle stocks are those where the handle is forming close
to the high of the left side of the cup, with the price within 15% of its
old high. But for those of you who are adventurous, we also offer a screen
of Cups With a Low Handle, where the price is 16-40% below the old high. If
you do consider buying these, remember, there will be overhead resistance
that you will have to trudge through as the stock attempts to reach its
old high and continue upward.
Stocks in these screens are sorted in descending order by the number of
weeks it has been since they had experienced the old high at the left lip
of the cup, so the stocks at the top of the tables have been basing the longest.
Stocks in the Cups-With-Handle screens must satisfy the following requirements:
- The Cup-With-Handle formation must be from 7 to 50 weeks old
- The Handle must be at least 5 days long and no more than 8 weeks old
- The Handle must take up less than 40% of the full cup-with-handle formation
- Lowest ADX Value seen during the week is no more than 30
- MACD is bullish (above the zero line)
The usual trading strategy for a Cup-With-Handle would be to buy the stock as it
bursts above the high price of the handle (pivot point) on heavy volume. With a nice
downward-drifting handle, some investors like to get in a tad early by
buying just above the downward trendline of the handle.
You can either keep a personal watch list of Cup-With-Handle stocks and watch
them closely for breakouts throughout the trading day, or you can place a
buy-stop order with your broker just above the pivot point or downtrend line.
If you use the buy-stop approach, make sure that the stock had a high-volume
day (at least 50% above average) on the day it hit your stop. If your stock
just limped to new highs on paltry volume, it most likely will not have the
momentum to achieve a big advance over the next several weeks.
As mentioned in the New Highs and Volume section,
you want a stock that has a big commitment on the part of buyers.
Other stocks that are consolidating close to their 52-Week Highs are reflected
in our Ceiling Bumpers screen. These stocks don't
exhibit the behavior necessary to appear in the Cups-With-Handle screen, but
they can still be worth a look. Any stocks that do break out to new highs during
the week will be reflected in our Ceiling Bursters
screens.
See Cups-With-Handle tables from several weeks ago.
On Apr14,2003, SINA appeared on the Cups-With-Handle stock screen. As you can
see in the illustration below-left, SINA had a big run-up in late 2002 and peaked
in late Jan2003, when it started forming the cup's left side. The right side of
the cup was formed in March, and the handle was established in late March and
early April. The entire structure was 11 weeks long, with the handle being 2
weeks long. The next day, it advanced 11.4% on 2.6x the average volume and quadrupled
in value in a little over 3 months.
BEFORE
(As Of Apr14,2003)
An 11-week-old Cup-With-Handle formation
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AFTER
(As of Jul29,2003)
It jumped over 300% in a little over 3 months
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