Cup-And-Handle Characteristics

I used to follow William O'Neil around the country (about 15 or more years ago) to take in his free presentations about How To Make Money In Stocks. These were great presentations, much more than a sales pitch for his newspaper, the Investor's Business Daily. Instead, they were high-level training sessions for the entire CANSLIM system, along with plenty of charts and examples on stock basing patterns and how to interpret them.

I can remember one such session - I think it was in Santa Barbara, CA on a sunny Summer morning. It was in some hotel conference room, and there were about 150 people there to take it in.

He reached a point in the presentation where he was showing us charts on the screen from his paper that morning, showing us what to look for in a stock, and there was one that in particular that caught his eye. He pointed out the cup-with-handle formation. I noticed the symbol was GADZ, although O'Neil insists you have to call it by the company name, not the symbol. It was one of those small-cap stocks, I think around 12 dollars / share. It appeared to be pushing its way up out of a cup-and-handle basing pattern, but on relatively light volume.

"And here's one... Gadzooks (it was the name of the company)... GADZOOKS!! Look at that!!!" He got really excited, and proceeded to tell us how a breakout on light volume can be a very bullish sign, as it break out easily, without any selling pressure.

In those days I thought the cup-and-handle was a magic pattern, and if you find one (or what you think is one) it it just automatically has to go up. So I went home and bought GADZ the following Monday, on the open. To my astonishment, it gapped out and went straight up, like about 15%, within just an hour or two. And then even more to my astonishment, it spent the rest of the day selling off, collapsing below the buy point, and breaking down into the base again. I think I barely managed to break even.

Anyway... I spent the next umpteen years learning about all the patterns that "don't" work. The magic cup-and-handle doesn't come along every day. It needs to have some extremely exacting attributes to be successful, one such attribute being the timing of the overall market. Patterns occurring as the market heads into a correction will be very failure-prone.

Stocks that break out first will be the leaders of the next uptrend. These will be the good-looking basing patterns, usually fairly long-term, showing a relatively flat spot along the lows of the cup and especially the handle, on dry volume, instead of a choppy V-like bottom. The volume bars will step up on an up day, and then "triangle" back down over the next few day as the price stays in a tight range. The handle should show a downward-drifting characteristic, and definitely should not be "wedging" up to the breakout point.

As time goes on and the leading stocks appear to be extended, and if you sold them too early, you might go looking for something that hasn't broken out yet. But this is probably not a good idea. These tend to wind up being the bad stocks, the ones that cost you. If they form a basing pattern it will be a loose, choppy one, and a breakout will more likely fail.

Here's a fairly large chart of GOOG showing what could be construed as a cup-and-handle, getting near it's highs, about ready to break out. In the old days that might have been good enough, but with more experienced eyes I'm not seeing any of these desirable features. It reminds me of things I used to get hammered with when past bull markets topped out. Sure, the pattern could tighten up and start acting right at some point, and really break out, but for now it looks like more work is needed.