V.13:07 (292-297): Trading with the Cup-with-Handle by Gregory Kuhn
Here are some more nuances for trading stocks based on the charting pattern called the cup-with-handle pattern introduced by William O'Neil.
How much would you pay for a trading system that accurately identified the buying trend of the smart money early enough to profit? Would you spend no more than the annual subscription to a chartbook service? The biggest problem in searching for chart formations is that if you look hard enough at a stock's one-year graph, you're bound to find any formation you want to conform to your bias. But the smart money has a way of leaving subtle footprints in the way some chart patterns form.
The cup-with-handle pattern, when combined with price and volume action, is often the result of such footprints.
The volume surges that typically accompany the rally days in a sound cup-with-handle base - clues that investors are building a position - don't occur because there are more buyers than sellers; they occur because the buyers are much bigger. The mystique behind the cup-with-handle's basic structure, however, is nothing more than understanding a simple technique - the 1-2-3 change of trend as explained by Victor Sperandeo in Trader Vic: Methods of a Wall Street Master. Sperandeo points out that fortunes are often made by simply identifying a change of trend. Of all the technical indicators and rules I have studied over the years, this single rule is by far the most important I've learned.
The 1-2-3 change of trend - hidden within the cup-with-handle - gives a trader the opportunity to get on board a new uptrend at its earliest emerging point. Let's look at the 1-2-3 change of trend as part of the development of the cup-with-handle pattern.