It's interesting how many stocks will follow similar patterns at the same time. Because most stocks will move in concert with each other, traders will see the same pattern developing across numerous stocks in diverse sectors.

Currently, there are some cup-and-handle bases forming, which could lead to continuation moves to the upside in the near future. The cup and handle was introduced by William O'Neil in his book, "How to Make Money in Stocks". The basic premise is that the cup and handle is a consolidation pattern that consists of two parts. The first is a consolidation that takes the shape of a rounded bottom, or saucer, which is labeled the "cup". After the right-hand side of the cup forms, often a stock will pull back partially in a flag-type pattern, which gives the bases the appearance of a "handle". Once a stock clears the handle, the pattern is considered confirmed and often makes a continuation move higher.
IN PICTURES: 7 Tools Of The Trade

Health Net Inc. (NYSE:HNT) is a pretty good example of a cup-and-handle base that hasn't yet been confirmed. Notice the rounded consolidation that would constitute the cup portion of the base from January through mid-March. HNT tested its January high at the tail-end of the cup and has been pulling back on declining volume as it forms the handle. For the pattern to be complete, HNT will need to trade above the March high, which would have a projected target near $30 a share. (For more on this topic, check out Analyzing Chart Patterns: The Cup And Handle.)

Source: StockCharts.com

Advanced Micro Devices, Inc. (NYSE:AMD) is another stock in the midst of forming a cup-and-handle base. AMD had a nice rally into early 2010 before running into some resistance near the $10 price level. It pulled back from this level, but gradually began to turn higher. It retested the $10 level in March and has been consolidating there for a few weeks, forming the handle for this pattern. If AMD can clear this level, it should lead to an upside breakout.

Source: StockCharts.com

Medicis Pharmaceutical Corporation (NYSE:MRX) is another example of a cup and handle, although the handle portion falls short of the left side of the base. While this is not ideal, the accumulation pattern remains similar. Notice the left side of the base has an initial increase in volume, but it tapers down as it nears the bottom of the cup. Volume begins to increase again as it rallies to the top part of the right side, and begins to taper off again as it builds the handle. This price action is consistent with accumulation, and while it's not a picture-perfect pattern, it is still constructive. The key area to watch is near $26.50 for MRX to clear the handle.

Source: StockCharts.com

MercadoLibre Inc. (NasdaqGS:MELI) is an example of not only a cup and handle pattern that is not picture perfect, but also one where the stock has cleared the handle. The right side is also higher than the left side of the and the depth of the pullback makes the preceding trend look questionalbe. However, if you scale further out, it is clear that MELI has been in an uptrend since bottoming out in late 2008. When put in that context, this consolidation looks very constructive. MELI has already cleared the handle, suggesting at least a test of the highs near $55.

Source: StockCharts.com

Bottom Line
As with all patterns in technical analysis, it's important to not get caught up in whether the pattern is picture perfect or what it is labeled. Traders should pay close attention to the price and volume patterns to determine what holders of the stock are doing. More often than not, patterns do not follow their precise definition, but by paying attention to subtle clues a trader can identify accumulation patterns. Each of these stocks appears to be in the midst of completing cup-and-handle bases, and could be poised for continuation moves higher.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Trading Strategies

    How To Buy Penny Stocks (While Avoiding Scammers)

    Penny stocks are risky business. If want to trade in them, here's how to preserve your trading capital and even score the occasional winner.
  2. Chart Advisor

    Stocks to Short...When the Dust Settles

    Four short trades to consider, but not quite yet. Let the dust settle and wait for a pullback to resistance for a higher probability trade.
  3. Technical Indicators

    Using Moving Averages To Trade The Volatility Index (VIX)

    VIX moving averages smooth out the natural choppiness of the indicator, letting traders and market timers access reliable sentiment and volatility data.
  4. Chart Advisor

    Strategizing for a Market Fall...or Rally

    The downtrend isn't confirmed yet, so be prepared with trades for whether the stock market rallies or continues to fall. Here's how to do it.
  5. Trading Strategies

    Are You a Trend Trader or a Swing Trader?

    Swing traders and trend traders execute market timing strategies that require different skill sets.
  6. Technical Indicators

    Detrended Price Oscillator Trading Strategies

    The detrended price oscillator (DPO) offers a simple approach to cycle analysis, removing momentum and long-term trends from the equation.
  7. Investing

    Using Fibonacci to Analyze Gold

    Use Fibonacci studies to analyze gold by picking out hidden harmonic levels that can provide major support or resistance.
  8. Investing

    Predictions For The Stock Market

    Learn different choices and strategies that can be used to create a profit regardless of what direction the market is going.
  9. Chart Advisor

    Top ETF Performers YTD - They'll Surprise You

    The top performing ETFs of 2015 may surprise you. Here they are, and the outlook for them going forward.
  10. Chart Advisor

    Four ETFs for Trading Falling Crude Oil

    Commodity traders are turning toward oil because the recent move below a key support level is signaling a move lower. We'll look at four ETFs you can use to gain exposure.
RELATED TERMS
  1. Fintech

    Fintech is a portmanteau of financial technology that describes ...
  2. Indicator

    Indicators are statistics used to measure current conditions ...
  3. Intraday Momentum Index (IMI)

    A technical indicator that combines aspects of candlestick analysis ...
  4. Mass Index

    A form of technical analysis that looks at the range between ...
  5. Money Flow Index - MFI

    A momentum indicator that uses a stock’s price and volume to ...
  6. On-Balance Volume (OBV)

    A momentum indicator that uses volume flow to predict changes ...
RELATED FAQS
  1. What assumptions are made when conducting a t-test?

    The common assumptions made when doing a t-test include those regarding the scale of measurement, random sampling, normality ... Read Full Answer >>
  2. How are double exponential moving averages applied in technical analysis?

    Double exponential moving averages (DEMAS) are commonly used in technical analysis like any other moving average indicator ... Read Full Answer >>
  3. How do you know where on the oscillator you should make a purchase or sale?

    Common oscillator readings to consider making a buy or sale are below 20 or above 80, respectively. More aggressive investors ... Read Full Answer >>
  4. What are the alert zones in a Fibonacci retracement?

    The most commonly used Fibonacci retracement alert levels are at 38.2% and 61.8%. A 50% retracement level is also commonly ... Read Full Answer >>
  5. How was the Fibonacci retracement developed for use in finance?

    The use of Fibonacci retracements in stock trading was popularized by noted technical analysts W.D. Gann and R.N. Elliott. ... Read Full Answer >>
  6. How was the stochastic oscillator developed?

    The history of the stochastic oscillator is filled with its own controversies and inconsistencies. Most financial resources ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!