Golden Ticker - "IBD Stock Trades Made Easy"

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If there was a "holy grail" in stock chart patterns, it would have to be the "Cup-With-A-Handle." According to William J. O'Neil, - founder of Investors Business Daily and the author of the seminal investing book "How To Make Money In Stocks," this pattern is the strongest one a growth stock can have.

The cup portion of the base starts forming after a previous run-up of at least 30%. During the prior move you want to see weeks of heavy volume where the price moves up. You also want to see the Relative Strength line improving. Look for a clear and definite prior uptrend.

The usual price correction from the peak to the bottom of the cup is usually around 12% - 15% and up to 33%. In a severe "bear market" a cup can sometimes be as deep as 50% or more. Growth stocks normally correct 1 1/2 to 2 1/2 times the general market. Stocks correcting more than this should be avoided.

In most cases the bottom part of the cup should be rounded like a "U" shape and not harsh like a "V." This allows the stock time for the buyers and sellers to find their equilibrium and it takes most of the "speculation" out of the stock.

At the bottom of the cup look for a shakeout or a sudden large price drop and then recovery to scare out the last of the weak holders. You also want to see areas of quiet trade at the bottom.

You also want to see "tight" price action in cup. On a weekly chart, tightness is small price movements from high to low for the week. It's also nice to see nearly un-changed closes for a few weeks as well. Wide price movements attract too much speculative attention to the stock and lessen the likelihood of a successful break-out.

As the stock climbs up and forms the "right" side of the cup you want to see days and weeks of heavy volume price moves. Gap ups on heavy volume are also desirable. Also, the number of heavy volume up-weeks should out-number the number of heavy volume down-weeks. Big volume up weeks, followed by light volume down weeks are good as well.

The Relative Strength line should lead or at least closely follow the stocks price into new high ground.

The cup portion of the base should last 7 weeks minimum to as long as 65 weeks. Most cups last three to six months.

HANDLES
The handle portion of the base is formed after the stock has built the right-side of the cup. A proper handle is at least one or two weeks long and "drifts" down in price along it's lows. Volume will dry up near the bottom of the handle.

If the handle "wedges" up, the handle did not serve to "shake-out" the last of the weaker holders and set-up the next price move. Wedging handles carry significantly more risk that the base will fail.

Handles usually form near the prior high of the cup (the high of the left side) and must form in the upper-half of the cup. The middle point of the handle should be above the middle point of the cup. The handle must also be above the 200-day moving average.

In a "bull market" the handle should drop no more than 10% - 15% from it's peak unless the stock forms a very large cup.

PIVOT POINT
The "buy point" or "pivot point" is usually ten cents above the highest point of the handle. You only want to buy here if the daily volume increases at least 50% above the average daily volume for the last 50 days.

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