Do You See What I See?

Let's go through a quick exercise to get loose. I have a chart of United States Steel (X) posted in front of you (click on the image to enlarge). After a solid earnings report and a declaration of a dividend, US Steel is making new highs. Is there a trade here? What do you see and most importantly what would you trade and why?

Cup and handle inside ANOTHER larger cup and handle (5 year chart). Either way it's a breakout with a minimum $10 price target. Giddy up.

Jeff,
X has made me mucho moola in a past life (the stock... didn't know about options back then) and has tons of potential with the world demand for steel being what it is. This looks to me like a classic bull flag, but earnings always make me wonder whether it's a pattern, or a knee jerk reaction. I would wait until tomorrow to confirm. Steel demand will increase as we head into the spring and I see the stock doing well in the long-term. I think the flag pattern is good for $10 over about 3 weeks (the March $75) but I'd seriously look at the April $75 too. I could buy 2 contracts of either one and stay within my guidlines. I'd also consider putting some of this into my retirement account in stock form.
Chris and Catherine (on the way to the ski hills)

PS I also meant to mention that the stock has been increasing all day, which to me indicates that the news simply opened the gates for a bunch of pent-up demand for the stock. It wasn't a spike at earnings announcement and then a petering out of demand. I think tomorrow will be up again. Hmmmm maybe I should get in today.
Chris and Catherine

I see a flag/pennant. I'm a little more conservative, I see about a $7.00 move to around $85-86, short-term.

Joel

Jeff,
I see a break out to a new 52 week high on good volume. I'd buy and set a stop at $78.75 (close of 12/8).

Randall Leath

Oh, why didn't I come visit the site while the market was open? I get too preoccupied with watching charts move all day on days that I have the opportunity. This has got to stop--it is very addictive! Okay, this is good, i am writing about it, admitting it, and NOW i must DO SOMETHING about it! Any suggestions?

Anyway, I agree, THIS is the perfect setup!
52 week high, huge volume, breakout from flag today which has a $10.00 flagpole.
Plus the group is very strong. No earnings to worry about--I'm in!

Valerie W

Valerie,

Don't be so sad. I got in while the market was open and watched it drop $.60 in 5 minutes.

Anyway, this is a great setup and hopefully it will follow through tomorrow.

I am going to go with a confirmed cup and handle formation since the price broke above the rt. side of the cup with good volume. The distance from the bottom of the cup to the right side of the cup is approx. 9.4 so I would anticipate a price target of approx. $90 over a seven week period. If I were aggressive, I would buy OTM options so as to load up on more contracts such as the March 85 calls or consider buying the April 85 calls just to give myself some breathing room. I would set my stop at 3% below the rt. side of the cup which is approx. $76.6. There is no change in the price in after hours trading at this point. The implied volatility is somewhat higher than the historical but I don't think it is enough to keep me out of the trade. I am going to include below a nice summary of the cup and handle pattern that I like to refer to. If my interpretation of this chart is correct, then my name is Sean M. If it is wrong, then my name is Chris and Catherine. :}
PS. I live in California so if I am wrong I do not have the luxury of decapitationg a snowman to ease my stress.

Happy trading.

Cup and Handle Chart Pattern

Implication
Description
Important Characteristics
Trading Considerations
Criteria that Supports
Criteria that Refutes

Implication

A Cup with Handle is considered to be a bullish signal.

top

Description

Cups with Handles are similar in appearance to Rounded Bottoms. Like rounded bottoms, the pattern includes an elongated U-shape. However, the pattern also includes a short period of consolidation of 1-2 weeks in duration, which tends to be downtrending. The pattern is similar in appearance to a coffee cup with a right-side handle, and indicates the potential for an uptrend.



Important Characteristics

Following are important characteristic to look for in a Cup and Handle.

Shape

The cup always precedes the handle. As the cup develops, the price pattern follows a gradual bowl shape. There should be an obvious bottom to the bowl; a v-shaped turn is not a good indicator.

The depth of the cup indicates the potential for a handle and subsequent breakout to develop. The cup should be fairly shallow.

The handle tends to be down sloping, and indicates a period of consolidation. Consolidation occurs when the price seems to bounce between an upper and lower price limit. You can track the down sloping angle of the handle by drawing trendlines across the upper and lower price limits. If the price ascends outside of the trendlines, then it has the potential for breakout. If the price ascends beyond the upper, right side of the cup, then the pattern is confirmed, particularly if it is accompanied with a sharp increase in volume.

Volume

Volume tends to parallel the price pattern. Consequently, during the cup formation, as price descends, volume tends to decrease. Following a period of relative inactivity (at the bottom of the cup), the price pattern starts an upward turn and volume tends to increase.

During the handle formation, the volume decreases. However, you will notice an increase in volume when the price breaks out beyond the right side of the cup.

Duration of the Cup and Handle

Rounded Bottoms are long-term patterns. Martin J. Pring identifies that the pattern can occur over a period of about 3 weeks, but can also be observed over several years.

top

Trading Considerations

Duration of the Pattern

Like Rounded Bottoms, the Cup with Handle is a long-term pattern. According to O'Neil, the cup duration is between 7 to 65 weeks. According to Gregory Khun, the cup "is usually three to six months in duration but can be as long as 12 months during bear markets or as short as seven weeks during bull markets." The handle usually develops in 1-2 weeks.

Target Price

Understandably, investors like to buy at the lowest possible price. Ideally, investors would buy at the bottom of the cup formation. However, by the time the handle formation begins to develop, investors must gauge their level of risk. There is no surefire way to predict when the lowest point will occur, and there is a possibility that the pattern will fail, and breakout in a downtrend.

Some technical analysts believe that the best time to buy is after the handle begins to ascend. According to Rick Martinelli and Barry Hyman, O'Neil "recommends buying stocks only as they break out of the cup-with-handle to new highs". Khun suggests a more aggressive method of buying stocks. He suggests that "experienced traders can buy in increments in anticipation of a breakout, but it's tricky."

The handle will often slope downwards initially, however, watch for the price to breakout beyond the price at the right side of the cup. The depth of the cup from the right side is an indicator for the potential price increase. However, Bulkowski notes, "Many cups fail after rising only 10% to 15%. Be sure to use stop-loss orders to limit losses or to maximize gains".

top

Criteria that Supports

Volume

Volume tends to parallel the price formation. During the handle formation, watch for the price and volume to increase. An increase in volume is an indication that the pattern has potential to continue the uptrend, and ascend beyond the right side of the cup.

top

Criteria that Refutes

V-shape

There are v-shaped patterns that yield successful returns, however, during the cup formation, watch for a rounded shape because the rounded shape provides a more reliable and predictable formation.

Down sloping handles

The handle will tend to be down sloping, however the following criteria indicate a potential failure:

the handle should not drop below the top half of the cup formation
the price should not drop below the 200 day Moving Average

Hi Jeff,

I don't see this as a cup n handle. The bowl is too raggedy for my tastes.

This stock has made explosive moves in the recent past so despite the current extended move I still think it has room to go.

We've got a flag and 52 week breakout.

I would consider two trades. Sell the March $80 put if you like getting some cash right up front or the March $85 call.

I wouldn't buy the call unless the stock moves up above the close intraday and my mental stop would be a penny below today's open.

I still have the recent ATI earnings breakout in my head with it's viscious pull back the next day only to move up later. So I wouldn't just buy this at the open.

MikeH

Jeff - Not a comment on the stock - Love that "click to enlarge" feature. I've had a lot of trouble seeing the charts before - that really helps.

John M.

X is a bullish stock hitting all time highs. It is breaking out of a cup and handle pattern formed over 8 months, with increased volume after its earnings release today. The handle could also be viewed as a double bottom. Either way, this stock is breaking through it's resistance. Based on a double bottom, X has a potential target of 88.3 in the next 2 months. I would buy an April call option, setting the stop loss at 77.8, 3% below its breakout. Even though this stock has not outperformed its strong uptrending sector, a Reward:Risk of 3:1 with a breakout after EPS release does make this a potential buy.

Danuta
PS....Nice to have these trades back....thank you....

I see a bull flag breakout with about a 7 point move. Target would be around $85. Breakout is supported by huge volume. Not only a breakout of a flag, but also a 52-week high breakout. On top of that the Imp. volatility is extremely low, which means cheap options. Had I known about this trade yesterday before the market closed, I would have definitely placed the trade. However, it is too late for me to enter it now.

What I see is that I am not in the trade, I missed it and now need to wait for the return move if it happens.

To me is a nice bullish flag.

Alessandra

If you go back to July 12 to Nov 17 I see a cup and handle with about a $14.00 move which it has now made about a $13.00 move. As of late I see a bull flag that has about a $7.50 move. Which I have already missed $3.00. I would have considered the April 75 call.

Gwendlyn

From Jeff' list stocks that are breaking out:

MDRX
EXP
KYPH

If you look at the 15 min chart starting at 6:30 Calif. time this morning it made a pennant and the price started falling - It is a $4.00 dollar pennant - does that mean the intraday could fall $4.00????? A little extreme I think. I will continue to watch

Gwendlyn

BTW, BOL broke out of it's pattern yesterday and is continueing the run today. The volume looks weak on the 1 year chart because of a few volume spikes a year ago. On a 6 month chart, volume confirms the breakout.

Joel

FYI....All major indicies have made bearish crossovers on weekly charts using a slower 12-26-9 MACD. The last time this happened was in May. Just food for thought.

Robert G.

Post a Comment
...I'M AN OPTION ADDICT...I'M AN OPTION ADDICT...I'M AN OPTION ADDICT... ...I'M AN OPTION ADDICT...I'M AN OPTION ADDICT...I'M AN OPTION ADDICT...

About me

  • I'm Option Addict
  • From Saratoga Springs, Utah, United States
  • I am a professional trader and an instructor for Investools. I've had relations with the markets for 9 years. Born in Concord, CA, but reside in Saratoga Springs, Utah. Father of THREE, Husband of one.
My profile

Prescriptions Here!

Other stuff

Blogarama - 
The Blog Directory
Directory of 
Finance/Business Blogs Finance 
blogs Top Blogs Finance Blogs - BlogCatalog Blog Directory