Today’s Trading Lesson From TradingMarkets

Cup and
Handles, the easy-to-recognize Head and Shoulders, and Triple Tops
and Bottoms: Intermediate-term and position traders are all-too-familiar with
these formations and have utilized them in trading and the study of technical
analysis for the last 30 years. While the patterns themselves are still valid to
recognize, for whatever reason these constructs, which usually trace out over a
period of many weeks or months, can also take only a fraction of that time to
play out. However, these “mini” or “micro” versions are excellent signals for
the short-term and swing trader to key off when stalking for setups, and can
often be precursors to profitable moves.

The best thing about these “little”
versions of these well-known patterns is that they occur in all time frames, and
can be exploited by all traders, whether they be a strict daytrader, swing
trader or position player.

The Mini Cup and
Handle

One of the most popular patterns to
intermediate-term traders is the Cup-and-Handle or Saucer-with-Handle pattern.
Popularized by William O’Neil in his groundbreaking book How To Make Money In
Stocks, this formation is usually recognized by weekend chartists who flip
through numerous charts looking for stocks who have sold off, bottomed and
complete the base by rising to complete the cup section over a three- to
six-month period before building a slightly downward wedging handle over the
next two to four weeks. Compress this time for the mini version into as little
as 10 days to two weeks, and you have similar potential for a profitable move
over the next few days. When you can spot them in conjunction with prior price
behavior around a moving average, for example, the likelihood of follow through
is increased.

American Standard (ASD)
has exhibited a tendency to head for higher ground at or around the 20-day
MA. When a mini Cup and Handle takes shape at the end of February, a five-day,
4-point run allows the swing trader to capture the majority of the move.

The inverse of the mini
Cup and Handle works equally well to the downside:

AG Edwards (AGE)
appears to find support time after time just below the 45 area, but the mini
inverted Cup and Handle is a signal to look out below. After a break of the
handle and a one-day fake-out (A) AGE drops 22% over the next month.

Head
and Shoulders

The Head-and-Shoulders
pattern is normally looked at by the majority of technical analysts as a
bigger-picture top of a bottom formation whose signal is triggered when the
neckline of the pattern is broken. As with all chart patterns, the Head and
Shoulders does have some room for interpretation, but is characterized by the
highest point of the pattern being between two lower highs which draw the
shoulders. Like the mini Cup and Handle, this micro version can also play out
over a few days, as opposed to weeks. It is normal for the stock to make one
probe back to the level of the neckline after violating it, so that often
becomes a higher percentage play for the swing or position trader if it takes
place, while the day or swing trader can be a little more aggressive and play
the original breakout and the second move if they get entry points and pattern
setups.

Andrx Group (ADRX)
violates the neckline of the mini Head and Shoulders in mid-February and
after chopping around, returns as expected to touch the point of the breakdown.
The stock then proceedes to shed 20 points, or 33% of its valuation in the next
nine trading days.

Helmerich and Payne (HP)
forms a micro inverted Head and Shoulders over an 11-day period in a strong
uptrend. When the right shoulder and neckline is broken, the stock goes on a
multi-day surge to new highs, a quick hit-and-run grabs most of an 8-point move.

Triple
Bottoms and Tops

Triple Bottoms and Tops
are employed by the majority of technical analysts to spot bigger-picture
reversals or the end of the recent trend. In the mini version, these patterns
are often forerunners of short-term future price action. You don’t see many
quadruple tops in the bigger picture, and in the compressed time frame, this
often is true as well.

Amerada Hess (AHC)
pulls back and consolidates into a trading range, forming a mini Triple Top
just below the highest swing high. After a short pullback and a reversal through
the Triple Top, yields a 5 point play.

Ballard Power (BLDP)
appears to be hanging on for dear life when the third low slightly undercuts
the other two in the formation. The following day the plug is pulled and BLDP
loses 20 points in a three-week period.

In conclusion, while
harder to spot than their larger counterparts, diligent study of the charts will
help make these diminutive forms much easier to weed out. Just as the grand
versions foreshadow large moves over time, for the short-term trader the “micro”
patterns are often great for forecasting a change in direction, continuation or
failure of a prior move for at least the near term. This is what make these tiny
mites pack a powerful punch