Author: ALAN FARLEY
Source
The cup without handle pattern can yield perfectly timed entries and opportune profits, if you do your homework. Just don’t confuse it with the better-known cup with handle because technical requirements are different.
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The cup with handle gained recognition after IBD founder William O’Neil defined the pattern in his 1988 classic “How to Make Money in Stocks.” It’s easy for a layman to recognize this formation’s familiar cup-shaped price bars and smaller handle.
The cup without handle is a similar bullish stock chart base. Flip through the charts, looking for a sideways pattern to form after a stock gains 20% or more then comes to a pause. A broad and shallow “U” shape will confirm you’re on the right track.
Consider the market psychology that drives pattern development. Breakout traders watch profits grow until a pullback begins. Demand for shares remains strong but those who bought at lower prices want to get out.
New buyers step in as old buyers leave, yielding a consolidation that holds firmly at or above long-term moving averages and ultimately near prior highs.
In a classic cup with handle, the stock stalls below the prior high and grinds sideways in a narrow range until the marketplace generates enough buying pressure for a breakout.
There’s no secondary consolidation in a cup without handle like there is a cup with handle. Instead, price action rallies toward the buy point, and then takes off in a sustained breakout. The buy point is 10 cents above the prior peak.
Rules For Cup Without Handle
- Expect at least 40% higher volume on the breakout than the stock’s 50-day average. Anything less could signal a failed breakout.
- The cup shouldn’t exhibit declines of more than 33% in a bull market, or 50% in a bear market.
- The pattern must be at least six weeks in length. (That’s one week shorter than a cup with handle).
Eli Lilly’s Cup Without Handle
Eli Lilly (LLY) broke out in January 2021 and rallied to a new high at 218. It reversed on above average volume and entered the first phase of a cup base that bottomed out near 180 in March.
The stock tested that level through April and rallied, completing the rounded look of the cup pattern (1). The uptrend moderated in May and took off in a breakout past a 218.10 buy point June 7, 2021, that posted a 429% volume increase (2).
The stock continued to gain ground, reaching the 25% profit target in August.
Please follow Alan Farley on Twitter @msttrader for daily stock market action.
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The post Bullish Stock Charts: How To Identify The Cup Without Handle Pattern appeared first on Investor’s Business Daily.