The Cup with Handle Pattern is formed when the stock takes a breather after a run-up. The strategy we use depends on the size of the run-up as well as the price action prior to the run-up. When the stock is trading in a normal trading range that was preceded by a price uptrend of 25% to 50% with Earnings and Relative Strength in the 85+ percentile in a strong Bull Market then we have something to get excited about. When a stock shows up in the CupWatch Daily Report with these conditions the smart thing to do is to create a chart for that stock in TradeStation and load the #CupTradeLE Strategy. Wynn Resorts Limited WYNN created such a setup from May to late August in 2013. The fundamentals were in the high 90’s so it was a traders dream.
The Chart below shows how the strategy managed the trades.
When traders see a stock make trades of this kind they begin to think all Cup with Handle patterns should perform in this manner. The only time we can expect to see a chart that looks like the one for WYNN is when like conditions exist.
On a number of occasions in the past 15 years we have had stocks that formed Inverted Cup with Handle patterns at the end of strong Bear Markets. As stated in the previous Blog I posted, the Inverted Cup with Handle is a signal that the Bear Market is coming to an end. This will be followed by huge uptrends in excess of 75% to 100+%. Many times the Cup with Handle pattern will form at the top of these run-ups. This is where the trader must be extremely cautious. Most of the time the Cup with Handle pattern is signaling the Top of the Market and it will fail as a normal Cup with Handle.
The chart below shows such a chart.
Since the run-up shown on the chart for VSH was greater than 100% we were expecting the Cup with Handle to fail after it broke out above the Pivot Point TrendLine. Once it reversed back down we were ready with the ReversedCWHTradSE strategy when it crossed below the PPTL.
The point I want you to take away from this and the previous Blog is that the Inverted Cup with Handle will signal the bottom of the Market after a long Downtrend and the Cup with Handle will signal the Top of the Market after an extended UpTrend. When these situations occur be prepared to use the Transition Phase trades. It will be the difference between being in a winning trade and a losing one. Once again the key is to “JUST BE PATIENT".