Bull markets are born on pessimism, grow on scepticism, mature on optimism and die on euphoria.

Wednesday, January 28, 2015

Winning System: Cup with Handle Pattern

According to William O'Neil, every individual investor need to study and benefit from stock charts. It's not enough to buy a stock simply because it has good fundamental characteristic, like strong earnings and sales. A stock's chart must always be checked to determine whether the stock is in a proper position to buy. 

He analyzed the greatest winning stocks of the past and discovered that there were a number of successful price patterns and consolidation structures that repeated themselves over and over again. History repeats itself because human nature doesn't change neither does the law of supply and demand. 

One of the most important and recommended chart pattern by William O'Neil is the Cup with Handle pattern. 

Some of the key points highlight by William O’Neil regarding this chart pattern in his book are as below

Cup patterns can last from 7 to 56 weeks.

The usual correction from the absolute peak to the low point (depth) varies from 15-33%

A strong price pattern of any type should always have a clear & definite price uptrend prior to the beginning of its base pattern

 At least 30% increase in price in the prior uptrend, together with improving relative strength and a very substantial increase in trading volume at some points in the prior uptrend.

Bottom part of the cup should be rounded and give the appearance of a “U” instead of a narrow “V”.

Stocks that come straight off the bottom into new highs off cups can be more risky because they had no pullbacks.

Formation of the handle area generally takes more than 1 or 2 weeks and has a downward price drift, volume may dry up noticeably near the lows in the handle’s price pullback phase.

Although cups without handles have a somewhat higher failure rate, many stocks can advance successfully without forming a handle

The handle should also be above the stock’s 10-week moving average price line. Else, the failure rate is high.

A price drop in a proper handle should be contained within 8% to 12% of its peak.

There should also be at least some tight area in the price patterns of the stock under accumulation. (Tightness is defined as small price variations from high to low for the week, with several consecutive weeks’ prices closing unchanged or the previous week’s close on a weekly chart.

When the stock charge through an upside buy point from the handle (pivot point), the day’s volume should increase at least 40-50% above normal

The pivot buy point in the handle area occur at 5-10% below the prior peak. 

So, get it? 
Look through some charts and learn. Let's see whether you can spot the next cup with handle or not

Above post is abstracted from the book "How to make money in stocks" by William O'Neil. 

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