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How To Trade the Cup With Handle Family of Trades

Article Eight In This Series

The fourth and final phase of the Cup with Handle Cycle is the Up Transition Phase.  This is by far the phase that offers the most rewarding trades.  These trades will be preceded by the Inverted Cup with Handle formation.  At the end of every Bear Market numerous Inverted Cup with Handle setups will be ready to fail as bearish trades and when the stock market turns to the upside they will rapidly follow.  The three strategies used during this phase offer a trader the opportunity to make low risk trades that will grow your capital exponentially.

During articles to follow I will go into detail on how the Up Transition trades performed during several bear market turn-a rounds since 2002.   As a trader you could only trade when this phase is active and sit on your hands the rest of the time while making more money than the majority of so called professional traders.  Of course most of you will not have the patience to do that.  Most think they have to be trading all the time to make big money.  Nothing could be farther from the truth.  All you need is to work with  two or three good stocks each year.  Some years there will be very few setups or none at all.  This will happen when the overall stock market is moving sideways.  During the 18 months Nicolas Darvas made his 2 million dollars he was out of the stock market for four (4) months during a bear market.  This is the biggest mistake most traders make.  This is due to all the hype gurus pitch to their clients about getting rich quick in the markets.  That is not going to happen.  If you were lucky enough to have success when you first began you would feel like you should be trading all the time.  This in turn would lead you to be in the stock market and have it move in the opposite direction causing you to lose most of your capital.

During the 1990’s it was easy to make money in the markets.  Just about everything was breaking out and going up.  Since then it has been a different story.  We have gone through several up and down cycles where traders needed to learn to watch for change in cycles and be ready to take advantage of strong moves early on as the stock market changed.  Before the Inverted Cup with Handle it was impossible to tell when a market had reached the bottom and was turning around.  Traders for decades have tried to find ways to get in the markets at the bottom so they could get ahead of everyone else on the uptrend.  The failed Inverted Cup with Handle does just that.

Whether you are a seasoned Cup with Handle trader or just someone getting started learning about this great indicator, it is important you know they are always formed after a stock has been in an uptrend for a period of time.  This first move up is the most powerful move the stock market will ever make.  The stock is coming right off the bottom after a prolonged bear market and is entering a new strong bull market so it is going to go up quick and we need to be along for the ride.  That is exactly what the Up Transition Phase is all about.  Most of the time when this giant uptrend slows to take a breather it will be forming a Cup with Handle completing the Cup with Handle Cycle.  Here is a chart to show what I am talking about.

At the end of a strong runup after an Inverted Cup with Handle most stocks will form a Cup with Handle during a consolidation. 

(Mouse Over Chart for Larger View)

Now that you know what is likely to happen after the Inverted Cup with Handle fails and takes off on a tear, let’s get back to our discussion of the Up Transition Phase.  As noted earlier there are three trades associated with this phase, the IHandle Trade, the IBounceOff Trade, and the ReversedInvrtedCWH Trade.

THE IHANDLE TRADE

When the Inverted Cup with Handle is formed right after the stock market has turned bullish the price will immediately start an uptrend.  When this is the case install the IHandle Strategy immediately so it is in effect the next trading day.  The above chart for VSH would have been an IHandle Trade.  As stated previously at the end of a bear market there will a good number of Inverted Cup with Handle setups.  All you need to do is watch for the stock market to change to a bull market.  Just because a stock forms an Inverted Cup with Handle formation doesn’t mean you should jump right on it expecting it to go sky high.  Like any other good trade it must have good fundamentals such as being able to show it has made money over several quarters and also it must be a strong stock among its peers.  Since the stock has been in a down turn for some time, its Relative Strength will be lower.  You need to do your research to make sure they meet your standards.  The above applies to all stocks traded in the Up Transition Phase.

The next two charts shows typical IHandle Strategy trades.  In both cases the UpTrend Trade entered a 2nd trade when the price wanted to go higher after the IHandle trade made its exit.

(Mouse Over Chart for Larger View)

(Mouse Over Chart for Larger View)

If the price is already in the Handle when the Bull Market takes over the price will do one of two things.  It will start its downward movement in the handle but before it breaks down over the Pivot Point TrendLine in will repel or bounce off the TrendLine.  Remember this line is a strong Support/Resistance line.  The second thing that may happen is the price will break below the line for a few days and then reverse and cross back above the Pivot Point TrendLine.  Both of these are outstanding moves and are easy to predict thus enabling you to make very low risk trades.  Which of these two strategies you use will depend on where in the handle the price is when the stock market turns around.

If the price has not crossed below the line you will be safe using the IBounceOff Strategy as shown in the charts below.  The chart shows how the strategy enters the IBounceOff trade when the price repelled off the Pivot Point TrendLine.  After the first trade made an exit and the price wanted to go higher two more Trend Trades followed that produced good gains.

(Mouse Over Chart for Larger View)

When you load the IBounceOff strategy into a chart as you see the price start going down in the Handle of an Inverted Cup with Handle setup there are two things that can happen, the strategy will enter a trade if the stock price starts going up, or the price will break down below the Pivot Point TrendLine.  If the latter happens the strategy cannot enter a trade so you are not at risk.  If the price does cross below the Pivot Point TrendLine it will be safe to unload the IBounceOff strategy and then load the ReversedInvrtCWH strategy (Reversed Inverted Cup with Handle trade).  The ReversedInvrtCWH will only enter a long position if the price reverses back up and crosses back above the Pivot Point TrendLine.  It is important you understand this paragraph.  These two trades are extremely low risk when used properly.  They also will get you in the market at the lowest possible price.  This will usually be at the beginning of a new Bull Market.  There is no other strategy that can do this.

Below are a couple of charts depicting the Reversed Inverted Cup with Handle strategy.  There have been numerous times when this strategy has paid huge dividends in the past.  I will be explaining some of these in future articles.

(Mouse Over Chart for Larger View)

Madden Limited (SHOO) was among several very strong stocks that had formed Inverted Cup with Handle patterns between January and March of 2009.  This was at the end of a devastating down turn during the mortgage crisis.  In my next article I will go into detail on how easily you could have predicted an Up Transition Phase that would lead to most of these stocks making gigantic gains.  When SHOO broke out of the Reversed Inverted Cup with Handle it soared to a 92% gain in two months.

The chart below for MasterCard (MC) formed an Inverted Cup with Handle Pattern in late summer of 2010.  After the Reversed Inverted Cup with Handle strategy made an exit the stock wanted to go up farther so the Trend Trade Strategy made the second trade as depicted on the chart.

 

(Mouse Over Chart for Larger View)

 

In conclusion as we have shown the strategies used in the Up Transition Phase offer the trader the opportunity to make low risk trades with the potential of making large gains in a short period of time.  You will be among a very limited number of traders that have even heard of the Inverted Cup with Handle pattern let alone know how they should be traded.  Once you have mastered the concepts laid out in this and previous articles you will be in a position to use the upcoming material to forecast moves in the stock market.