Trading Within The Cup by Rick Martinelli and Barry Hyman
The classic approach to trading the cup-with-handle pattern is buying on a pullback during an uptrend before price breaks out. But what about traders who prefer to begin taking a position in a stock as it is setting up, rather than waiting for it to hit a new high? Trading within the cup-with-handle is another way to profit.
In our October 1998 article, we described an automated approach to identify stocks that have set up the cup-with-handle structure with proper price and volume
characteristics. The impetus for writing such an algorithm is that, on any given day, there may be new stocks that break out of a cup-with-handle pattern, but by the time investors are aware of them, they could have already broken out to levels well above the pivot point.
Identifying stocks that are set up correctly
allows the trader to be watching for such
stocks before they break out. It also makes it
possible to buy these stocks just as they are
breaking above the pivot (on sufficient
volume). It is critical to buy a stock not more
than a few percent above the pivot price
because, in many cases, stocks tend to pull
back to and test the pivot area before
continuing their advance. If a tight stoploss
discipline is followed, the trader who
chases a stock too far above the pivot point is
likely to get stopped out on a subsequent
pullback to, or just below, the pivot point.