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How To Trade the Cup With Handle Family of Trades

Article Three In This Series

The Great Bull Market of the 1990’s instilled a sense of complete confidence in investor’s/traders.  There were plenty of articles explaining how the pundits had it all figured out.  With the use of computers we would be able to watch for flaws in our economical system and be able to head off any large downturn in the stock markets.  Every trade we entered had a good likelihood of having a positive turnout.  There were hundreds of young startup companies doing what Digital Lightwave (DIGL; discussed in previous article) did.  Many had quadrupled in share price and were making a huge number of millionaires.  This era became known as the Dot Com era since most of these were involved with the internet in one way or the other. 

Then it happened! The bursting of the Dot.Com bubble.  A good representative company was QUALCOMM.  It broke out of a Cup with Handle pattern in early February 1999 when it traded above its Pivot Point Trendline at $4.16.  Eleven months later on the first day of trading in January of 2000, it had a huge gap on the Open and reached a high that day of $100.  From there it was all downhill for this great company.  It was among the first to lead the downward spiral of thousands of companies to depths no one thought possible before.  On its way down stock market gurus were excitedly telling investors it was a great buy when it slowed down at $70 a share, the same thing was said at $50 then $30.  QCOM traded as low as $11.60 on August 5, 2002.  QUALCOMM was one of only a few that has been able to survive, many did not. 

This was the worst Bear Market our country had ever seen.  It was devastating for many investors and those about ready to retire as their savings accumulated over a lifetime of work in many cases, had been depleted.  Some on Wall Street were so devastated that suicide seemed the only way out.  Most had committed one of the Cardinal Sins of trading by staying in and riding the stock market all the way to the bottom.  Of course they did this because they listened to the so called stock market gurus.  You need to learn how to make good intelligent trades that have the least amount of risk and always use a stop-loss that will get you out if and when the market turns.  More on this later.

During this period and after months of research I finally stumbled onto the Inverted Cup with Handle.  In the years that followed I have conducted research on hundreds of stocks through many market cycles.  This research has revealed some very dependable predictions as to how and what the stock market will do under various conditions.  Without knowing about the Inverted Cup with Handle it would have been impossible to figure all this out.  It all comes down to how the Cup with Handle works in relation to the Inverted Cup with Handle and vice versa.

You know about the Cup with Handle now let’s learn about the Inverted Cup with Handle.  It is always formed in a downtrend during a period of consolidation (when the stock stops to take a breather).  The chart below for Best Buy (BBY) will show you how the Inverted Cup with Handle formation is formed and how it is traded.  The LeftSide (LS) is the lowest Close of the Downtrend just before it starts up to form the Base.  Like the Cup with Handle the Pivot Point TrendLine is formed by a horizontal line drawn from the Close on the bar that makes up the RightSide (RS).  The Short Trade is entered when the Price crosses below this Line.  There are some differences between the Inverted Cup with Handle and the Cup with Handle.  A stock in a DownTrend tends to be more volatile and the Handle can be much shorter as the Bears tend to get back in rather quickly.  Once the Price breaks down below the Pivot Point TrendLine it moves down quickly leading to large gains rather fast.

 (Mouse Over Chart for Larger View)

The trade depicted above shows the result of the Inverted Cup with Handle Strategy.  It is quite difficult to trade the Inverted Cup with Handle without a computerized system.  It is not necessary to have strong volume at the break down, unlike the Cup with Handle.

The next chart for Owens – Illinois (OI) provides another good example of how the Inverted Cup with Handle provides a good gain in a small amount of time.  In this trade the Inverted Cup with Handle trade was followed by the DownTrend Trade and the two netted a 32.6% gain in 15 trading days.

(Mouse Over Chart for Larger View)

The next chart shows the S&P 500 Index during a very volatile time in the markets.  This period was right after President Obama was elected and the beginning of the financial crisis.  There were several stocks that formed Inverted Cup with Handles during this time all of which were impossible to trade as the stock was so volatile that your stop-loss would be hit almost daily.  During these periods it is best to just sit back and watch.

(Mouse Over Chart for Larger View)

The extreme right side of the above chart shows the beginning of a turnaround market that begin on March 9, 2009.  In a future article I will show how one strategy picked this trade up for large gains on several stocks.  Before I show you those you will need to learn a few more steps in this process.  Remember I don’t want you to become confused by giving you too much at one time.  Believe me this is not rocket science because I figured this out after seeing it take place over several stock market cycles.  Please go back and re-read the preceding articles and study the charts until you get a good idea of both the Cup with Handle as well as the Inverted Cup with Handle.  You need to grasp both concepts because the fun is about to begin in future articles.