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.)


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.


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.


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.


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

    These Oil & Gas Stocks Have Reversed

    It's been a long downtrend for oil stock owners, but there's hope. These four oil and gas stocks have reversed and may keep trending to the upside.
  2. Chart Advisor

    4 European Stocks to Consider Buying

    European companies, listed on US exchanges, that are providing buying opportunities right now.
  3. Chart Advisor

    ChartAdvisor for October 2 2015

    Weekly technical summary of the major U.S. indexes.
  4. Investing

    How Diversifying Can Help You Manage Market Mayhem

    The recent market volatility, while not unexpected, has certainly been hard for any investor to digest.
  5. Technical Indicators

    Why MACD Divergence Is an Unreliable Signal

    MACD divergence is a popular method for predicting reversals, but unfortunately it isn't very accurate. Learn the weaknesses of indicator divergence.
  6. Chart Advisor

    Expecting a Big Breakout In These 4 Stocks

    These stocks are tightly wound following big moves, and upon breakout more big moves could ensue.
  7. Chart Advisor

    Trade Base Metals With These 3 ETFs

    News out of Alcoa is causing active traders to turn toward base metals for opportunities. Before diving into the market, check out the charts of these three ETFs.
  8. Charts & Patterns

    The Importance Of Tracking The Whisper Number

    Don't let the name fool you: Whisper numbers are making themselves heard. Here's why you should be paying attention.
  9. Chart Advisor

    Stocks With Buy Signals in a Bear Market

    The short-term trend may be down, but these stocks are showing strength to the upside.
  10. Chart Advisor

    ChartAdvisor for September 25 2015

    Weekly technical summary of the major U.S. indexes.
  1. What are some of the most common technical indicators that back up Doji patterns?

    The doji candlestick is important enough that Steve Nison devotes an entire chapter to it in his definitive work on candlestick ... Read Full Answer >>
  2. 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 >>
  3. 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 >>
  4. 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 >>
  5. 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 >>
  6. 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 >>

You May Also Like

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!