The Cover Version of Cup with Handle
Somebody once said there are no new songs; they just come back in different variations. You could say the same thing about patterns in the markets.Â
One of the common misconceptions among traders is that the more well known a
pattern setup is, the less effective it is. Yet we can go down the list of
“greatest hits” of all the most popular chart patterns and find an
abundance of them every day in all time-frames ranging from five minutes to
monthly.
We see useful pattern setups in the form of triangles, trendlines, Slim Jims,
cup with handles, pullbacks, head and
shoulders, support & resistance, etc., every day in TradersWire. Of course the market rarely offers patterns as neat and tidy as what you see in the textbooks. Sometimes they’re messy and you have to be able to adapt to the
variations.
In this example of SDL
(
SDLI |
Quote |
Chart |
News |
PowerRating), I see what I think could be called a
variation on the classic cup with handle.Â
Â
In the classic cup with handle, you want to see a handle form just
below the highs followed by a period of minor pullback coupled
with drying volume. Here, we see SDLI breakout to new highs and form a handle just
above new-found support above the breakout level. Volume exploded
along with price, but during the formation of the handle, has dried up. . .a
positive sign.
One advantage of the handle forming above the breakout level is that the
failure parameters are well-defined. If the price action within the handle
breaks down decisively below the level of the breakout, the pattern has failed.
Your stop-loss in this case can be fairly tight, i.e., just below the the breakout
level. Â
In the standard cup with handle, you have to use more subjective judgment in
determining where the failure point is, thus you’d tend to use a looser
stop-loss with a higher drawdown potential.
Have a great weekend. I know you’ll all need some rest after this week’s
“exciting” action.
Eddie