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. Chart Advisor

    ChartAdvisor for September 4 2015

    Weekly technical summary of the major U.S. indexes.
  2. Forex Strategies

    Two Great Currencies To Profit From Oil Volatility

    U.S. dollar crosses with Canadian and Australian dollars offer easy access to crude oil trends due to their tight correlation with energy futures.
  3. Investing

    Redefining the Stop-Loss

    Using Stop-losses for trading doesn’t mean ‘losing money’, but instead think about the money you'll start saving once you learn how they work.
  4. Chart Advisor

    3 Ways to Trade the Rising Volatility

    With volatility increasing in the markets, many are turning to these three volatility-capturing exchange-traded products.
  5. Chart Advisor

    Big Double Top Patterns On the Verge of Breaking

    These stocks have created big double top chart patterns, and are on the verge of breaking the patterns to the downside--a bearish signal.
  6. Chart Advisor

    Gold Struggles to Climb Higher and May Fall Soon

    Traders will be watching the price of gold over the coming weeks. We'll take a look at how a couple major moving averages are suggesting that the next move could be lower.
  7. Technical Indicators

    Use Market Volume Data to Determine a Bottom

    Market bottoms often carve out classic volume patterns that let observant traders make fast and accurate calls.
  8. Charts & Patterns

    Understand How Square Works before the IPO

    Square is reported to have filed for an IPO. For interested investors wondering how the company makes money, Investopedia takes a look at its business.
  9. Trading Strategies

    Who Actually Trades or Invests In Penny Stocks?

    Although penny stocks are highly speculative, millions of people trade them daily. Here are 10 different types who do.
  10. Chart Advisor

    4 Stocks Still Flashing Buy Signals

    In the midst of volatility and a big market sell-off last week, these stocks are flashing buy signals.
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. Tame Panic Selling with the Exhausted Selling Model

    The exhausted selling model is a pricing strategy used to identify and trade based off of the price floor of a security. ... Read Full Answer >>
  2. Point and Figure Charting Using Count Analysis

    Count analysis is a means of interpreting point and figure charts to measure vertical price movements. Technical analysts ... Read Full Answer >>
  3. 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 >>
  4. 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 >>
  5. 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 >>
  6. 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 >>

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!