Ask The Trader
Wednesday, December 06, 2000
A Beautiful Chart
What are cup-and-handle charts, and can they be profitable?
Cup-and-handle charts are usually formed in bull markets, but can be formed in market reversals as well. The pattern made famous by William O'Neal, founder of the Investor's Business Daily publication, must go through the following machinations before being considered a legitimate cup-and-handle.
First, a stock must break down on fairly good volume. It then starts to form a trough (or the bottom of the cup) by moving sideways. From the bottom of the cup, the stock rallies higher on volume heavier than the previous dip. Next, the stock forms the all-important handle. The handle is a crucial element of the formation and serves to shake out the last weak shareholders before the stock moves to higher ground. The handle should be a tight sideways to down-sloping move that comes on lower volume. Watch out for up sloping handles, though, as they do little to shake out weak shareholders and can lead to false breakouts.
The last key aspect of the cup and handle comes at the pivot or buy point. The buy point is just above the highest close of the handle. Be careful not to chase a stock too far from its buy point, since after breaking out, most stocks pause and settle back towards their handles. You know you have a winner on your hands if the stock holds above its pivot point.
The profit can come from buying at the pivot point because many traders are now expecting the stock to make another strong run.
With that said, lets take a look at this cup-and-handle formation in Kenneth Cole (KCP), which is nearly perfect. You might want to print and save this beautiful chart to compare to other possible cup-and-handle formations.
Good Luck and Have a Profitable Trading Day