Cups And Handles All Over

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THE BIG IDEA

We are seeing cups and handles everywhere, and not only because we are writing this from a neighborhood cafe.

The cup-and-handle is a widely recognized bullish continuation pattern in technical analysis lore. This pattern was popularized in the 1980s by William J. O'Neil, founder of Investor’s Business Daily. Markets evolve as the years go by, but things that worked decades ago can still be useful today. An aspect of the cup-and-handle pattern that has been lost over time - and the point of this post - is that style points matter.

$NVDA ( ▲ 1.76% ) is one of many stocks now in a cup-and-handle pattern.

The “cup” portion of the pattern for NVDA is a little ragged due to some day-to-day political events, but the basic form is still there. The pattern begins with a U-shaped price movement, resembling a bowl. This phase represents a period of consolidation where selling pressure slowly fizzles out, and buyers gradually regain control.

And then there is the classic “handle” formed by a period of quiet trading, with prices flat to down slightly.

Of course, the usual result is that prices end up blasting higher. It doesn’t always work out that way, and here is where those style points come into the picture. There are two characteristics that can provide clues that your cup-and-handle is fragile:

Volume - Pay attention to patterns in trading volume. If the left-hand-side of your cup is formed on heavier volume than the right-hand-side, this should be taken as a warning to stay away. Investors are more eager to get out than to get in.

Handle slope - If the handle digs too far down into the height of the cup, this is another sign of weakness. The flatter the handle, the better. Sometimes the strongest stocks skip the handle altogether and just keep marching higher.

If you are seeing alot of stocks with cup-and-handle patterns and you need to decide which one(s) to put your money into, then take note of the details. It will improve your chances of success.