An interesting addition to the technical analysis tool set is the Cup-and-Handle chart pattern. It is very much like a bullish 'saucer' or 'rounding bottom' pattern, but provides additional points of entry.
There is no better way to learn about new stock chart patterns than to look at a practical example. I have chosen the 1 year bar chart pattern of Maharashtra Seamless, because it has made a classic, and clearly identifiable, cup-and-handle pattern:-
The stock made a previous high of Rs 328 in Aug '08 before continuing its bear market down move. It finally made a low of 112 in Mar '09, before embarking on a sharp rally with the rest of the market. In the process, it made a 'rounding bottom' bullish pattern.
The stock went all the way up to Rs 325 in Jun '09 - nearly tripling in value from its Mar '09 low. Not unexpectedly, it faced resistance near its previous high, and the first attempt on Jun 5 '09 failed to go past it. Three subsequent attempts on lower volumes also failed.
The stock then entered a corrective downward sloping channel that has taken it towards its 50 day EMA at Rs 250, where it is currently seeking support.
The horizontal line connecting the two tops of Aug '08 and Jun '09 forms the top rim of the 'cup' at Rs 328. The 'rounding bottom' pattern completes the body of the 'cup'. The downward sloping corrective channel is the 'handle' of the 'cup'.
The progress of the 'handle' needs to be closely observed, because it can provide clues to what might happen next. The depth of the cup is a move of Rs 216 (= Rs 328 - Rs 112).
The 'handle' can retrace between a third and a half of the 'cup' depth. That means a retracement of between Rs 72 (=Rs 216/3) and Rs 108 (=Rs 216/2). So, the correction of the 'handle' should stop in the price zone between Rs 256 (=Rs 328 - Rs 72) and Rs 220 (=Rs 328 - Rs 108).
On completion of this corrective move, the stock price should break up wards again. This provides three possible entry points - should you be interested in entering this stock.
1. The first, and riskiest, point of entry is any time the stock goes below Rs 256 - like it has done now. Why riskiest? Because the 'handle' can go below the Rs 220 level and possibly negate any up move for now.
(There are other reasons why you may want to enter now. Rs 250 is a support/resistance level - as can be observed from the chart patterns made in Jul '08 and Sep '08 (supports) and Oct '08 and May '09 (resistances). The 50 day EMA is another likely support. The RSI has entered oversold region.)
2. The second, and less risky, point of entry will be when the stock breaks out upwards from the downward sloping trend line of the 'handle' formation.
3. The third, and safest point of entry will be when the stock moves above the cup rim level of Rs 328.
The Cup-and-Handle stock chart pattern usually shows up as a continuation pattern in a bull phase. In this case, however, it has formed a bottoming pattern. (There are some other stocks that are also showing a similar formation. Curious readers may want to try and find out some of these stock charts, as an exercise.)
An inverse Cup-and-Handle can form in bear phases or at market tops - as a variation of the rounding-top bearish pattern.
Here are some questions for my readers. What do you think about the 'handle' formation? Why is it happening? Is it an 'accumulation' or a 'distribution' pattern? (Just use your common sense, and provide your answers in the 'Comments' link, or email me directly.)