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How To Trade the Cup With Handle Family of Trades

Article Five In This Series

The Cup with Handle Cycle can start with any Phase.  For the purpose of this discussion I will start with the Bull Market Phase since it is the one most can identify with.  At the beginning of a strong bull market the price of most stocks will rise at a rapid rate.  This provides the uptrend found prior to the formation of the Cup with Handle formation.  The time period for this uptrend will vary according to the strength of the stock market.  It will normally be around six (6) weeks, give or take.  At this point the stocks will begin to take a rest as investors/traders begin to take profits.  Once the Cup with Handle pattern is completed the stock will break out and continue its uptrend until it hesitates once again to allow investors/traders to move money off the table.  The length of this rest period varies on the number of traders that want to get out and stay out.  If it is only a short time the price will form “flags” or “pennants” on the chart.  If it  is a longer period of time another Cup with Handle Pattern will likely form.  Many bull markets can last for a long period where this type of action will continue to take place.  During the 1990’s we were in a Bull Market most of the time.  If a stock continues in an uptrend where it creates four (4) Cup with Handle patterns we have found it is highly likely the fourth one will fail.  Therefore when the third one has completed its run we want to get out and look for something else to trade.

Just because a stock has formed a Cup with Handle Pattern in a Bull Market doesn’t mean we want to jump on board.  This is only part of the technical side of the trade.  We must consider the fundamental side also.  This means we must look to make sure it is a leading company in one of the Top Industry Groups.  It must have proven it can make a consistent profit quarter after quarter for a period of time.  When compared to other stocks it must maintain a high relative strength.  It must be in a period of strong accumulation which tells us Institutional Traders are jumping on board.  This will propel the price higher giving us a strong breakout, and providing us with a good chance for the price to continue to move up.

We use the CupTrade Strategies© to illustrate the trades we use in all these articles to demonstrate how the different trades are used.  Beside the fundamental and technical aspects there are several key factors you must check before you enter a trade.  These are already programmed into the CupTrade strategy and perform their function automatically.  Please not the list below:

  • 1.  Volume – At time of trade the volume must be trading greater than 125% of the 50 day average for listed stocks and greater than 150% for unlisted stock.  The total daily volume must be greater than 750,000 shares.
  • 2.  Price - You must wait until the price is trading at least 8 to 10 cents above the Pivot Point Trendline.
  • 3.  Price at time of trade cannot be greater than 5% above Pivot Point Trendline.  If it is, you MUST wait for a pullback.
  • 4.  Once in the Position you MUST enter a 7% or 8% Stop-Loss.

We understand that some Traders will want to vary from these guidelines so we built our systems so they can use Inputs to change these items to meet their own methods.  In the charts below we show how the Cup with Handle is traded in a Bull Market.  Note that once the first trade makes an exit and the stock shows it wants to go higher, the UpTrend Strategy will re-enter.  It can do this up to four times.  Then it must wait for another Cup with Handle to form.

(Mouse Over Chart for Larger View)

The Cup with Handle provides us with a precise point to make our entry.  The Exit Point is not so easy to determine.  It took many years to develop the code for the Seven (7) Exits used in our Bullish Strategies.  We also have Seven (7) different, but similar Exits that are effective in our Bearish Systems.  I could write a whole book on what went into developing our Exits.  They are designed to let the stock price peak and then trigger the exit once the stock starts its downward journey.  By doing this we will always leave some money at the top.  This is necessary in order to keep from getting out to early.  Remember this was one of the mistakes made by Darvas before he started to use the Trailing Stop.  CupTrade Strategies Exits will replace the need for Trailing Stops.  Realize It will take time to develop the trust needed to allow our systems to trade automatically.  You can select to follow the Strategy and make the trades manually until you gain the trust needed to go “Solo”.  The Strategies allow you to setup your trades in the evening and let them function while you are at work or on the golf course during the day.

Most trading systems only work for a short period of time especially if they are highly successful as the stock markets soon adjust to them quickly and they become ineffective.  The Cup with Handle pattern is unique in that it takes into consideration psychologically factors that other system do not.  The pattern its self is created by psychological behavior. 

(Mouse Over Chart for Larger View)

Study these charts carefully as they both have the critical criteria associated with a well formed Cup with Handle Pattern.  Remember in an earlier article I told you the Pivot Point TrendLine will act as a Support/Resistance Line in the future.  Notice how after breaking out the price went up for a few weeks and then started down.  It traded slightly lower than the Pivot Point TrendLine but it did not Close below this line.  The next day it gapped open higher and took off from there.  I want you to get used to watching the TrendLine as I will be talking about it a lot in the future.  It will be critical to your future trading.  Other traders will know nothing about it.  Once again it is a psychological factor that happens and the traders can’t keep from letting it affect them.

(Mouse Over Chart for Larger View)

The chart above depicts another well formed Cup with Handle pattern.  After breaking out, the price rose for several weeks and then made a correction downward.  Notice that the Strategy stayed in the trade and made a very good gain before making an Exit.  After the Exit was made the stock showed it wanted to go higher and that is when The TrendTrade made another Entry.  It was still in this trade when I took the screen shot.  A few days after the 2nd Entry the price went down for a few days.  We were kept in the trade as the price never traded below our Stop-Loss price previously set in the software.  We must always give the stock a little breathing room when we enter a trade as this type of action is normal. 

After a thorough analysis of this chart give an honest answer to the following question:  “Would you have been as successful making these trades?” 

These are the two strategies we use to trade stocks during the Bull Market Phase of the Cup with Handle Cycle.  In the next Article we will discuss trading stocks during the Down Transition Phase.