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