“Cup and Handle Pattern”

“The CUP AND HANDLE” pattern belongs to the top five most reliable and powerful patterns I know in the stock, futures, cash currencies and any other financial market. If you want to buy stocks right before their explosive rally, keep reading. In this post, we will discuss the most important thing in CUP AND HANDLE pattern trading, What is it like and what are its components.


Smart Money and uninformed crowd-specific habits in the formation of the CUP AND HANDLEpattern. You will see for yourselves that you will always need to side with Big Capital. I have developed a very effective technique that makes it possible to align this pattern with Big Capital behavior. I’ll show you how it works. Optimal entry point, optimal values for stop-loss, and profit target; The volumes are necessary for the pattern to work like a charm.


We will discuss real-world market case studies of stock here. If this is your first time and you want to learn financial market secrets: how to make money trading stocks and other securities, what are the most profitable strategies, what stocks bring the biggest returns, technical analysis tips and all types of other financial markets related stuff start now by subscribing my blog and follow every day so you don’t miss anything.

This is how the CUP AND HANDLE pattern looks on chart. This is a price move that at first resembles a cup and then the cup’s handle. When we trade the CUP AND HANDLE pattern, we expect that, after a minor downturn, there will be a breakout and the price will continue to rise. A previous trend is a necessary condition for forming the pattern. The stock price is within the uptrend, reaches a certain peak, and starts to drop.

At first, this downward move reaches stagnation, forming the base of the cup, and then the price rallies almost to the previous high level. This is the time when the traders who entered the position close to the first high begin to sell; the price goes down, forming a cup handle.

My approach to trading and investing is based on patterns in Big Capital behavior. I found out that any technical analysis pattern would work like a charm only if Big Capital intended to move the stock or futures price up. Once the Big Capital patterns in the financial markets come into action—conditions are created under which the crowd starts to sell; Big Capital buys stocks or other securities  from them at a reduced cost as it expects an upward price move.


When major players intend to continue moving the stock or futures price up, their actions result in the formation of the cup base—here they buy stocks or futures at low cost from investors in doubt. Little by little, the price begins to rally again, reaching approximately the previous peak level. At this point, the uninformed investors, who bought the stock or futures in the high area and did not sell at the level of stagnation, keeping a losing position, feel extremely happy about the possibility of closing the position without a loss or with a minimum loss.

This is where they begin to sell chaotically, and that’s why a second peak forms the pattern’s handle.At the moment when the crowd closes almost all their positions, Big Capital enters the market, increasing volumes, and the stock or futures price starts its rally. Little by little the crowd enters the market and helps to boost the new trend move. This pattern is formed at its best when the high on the cup’s right side is formed at the same level or a bit below the previous high level. When forming the handle, the stock or futures price has a slight downward drift.

If the handle drops below the mid-line, it is most likely that this pattern will not work. So we have two main points: old high #1 and new high #2. They serve as a certain critical level for the upper trend line of the CUP AND HANDLE pattern. When the market price reverts at this point and moves up again, we see that the CUP AND HANDLE pattern is formed.

That’s where things get interesting. Now I will speak about the entry into the position. It is a common belief that the most reliable entry point is right here—just above the level of the second high. Here’s my tip to you: This trend line breakout shall take place at large volumes, or an increased volume shall emerge right after passing this level. This is one of the signs that the large market powers are in the game. When trading any technical analysis pattern, it’s important to remember that the optimal entry into a position is within 5 percent above the pattern’s trend line. It is risky to buy stocks or futures after the price goes above 5% after the breakout but if you are a positional trader do not buy on breakout wait for a re-test of the pre-highs after the breakout, most of the time you will get one. This will keep you safe in case of a fake breakout but if you are a day trader then you can buy on the breakout as your stop-loss is small.

Now how long do we stay in the position? We need to measure the distance from the second high point to the cup base. The same distance applied to the handle’s bottom level gives us the target projection level. Classical stop order placement is the point just below the handle.

Now let’s talk about the duration. The best big winners that I’ve seen in different financial markets have the Cup formed for a rather long period—7 to 12 weeks, and even up to 20 weeks. So: Tip #1: Avoid handles that drop to or below the mid-line of the cup. Tip #2: Volume is the most important indicator of the CUP AND HANDLE pattern. The critical level breakout should be at the increased volume.

How to draw a “Trend Line” Correctly?


One of the most common forms of technical analysis is the use of trend lines, but are you drawing them correctly? If not, I’m going to show you how. Now, as we all know there’s a vast array of different forms of technical analysis that we can when we’re analyzing the market when making our trading decisions. But by far, the most common form, widely used is that of support and resistance; that we’ve discussed in our previous post. And today’s topic which is the trend line.

 Everywhere you look, it’s all about trend lines. You hear it on all our financial news channels; on the analytical reports that we read on a daily basis. We often hear about trend line support broken the trend line resistance and so forth. So I certainly think it’s important that you educate yourself on the subject trend lines to know exactly what it is that they are talking about. But before we get into the nuts and bolts, I want to define what a trend line is.

Now, the trend line is a line drawn between two levels on a chart that have acted at some point in the past as support or resistance turning points. Now, the more times price respects a particular trend line the more significant that trend line becomes, and as the price does test and challenge these trend lines that become our decision type. Will it hold and bounce off or will it break out of course? That’s the million-dollar question, of course.

But what I found over the years of trading is certainly teaching is that there’s a lot of confusion on exactly how and where to draw the trend lines in the first place. Indeed, this is not an exact science! There are two schools of thought here.

Do you draw the trend line from the highs and the lows of a particular candle or do you take them from the closing price? Now, personally, I like to take them from the closing price. There’s no hard and fast rule. There’s no right answer. You can either do one or the other, but that’s the point. You’ve got to be consistent in your approach. Now, there’s no good in taking a trend line from the higher one candle through the closing price of another candle, just to draw the trend line to fit into what really isn’t there. It’s more likely it’s going to pull out some inaccurate trading signals. So what is important is that whether you take it from the highs and the lows or from the closing place, you’ve got to be consistent in your approach.

Now, we’re going to see the charts and I’ll show you exactly how I caught my trend lines, and then more importantly or as importantly I’ll show you how I use them as well in my training.

Okay, so the first thing we need to be aware of and when we’re plotting trend lines are the direction of the trend. And the clearest way to identify the direction of the trend is by using your eyes. So where price has been to where it is going. You see here in this example price is down here. We’re making a series of higher lows, this is an up-trending market so we’re going to be placing a trend line below where the price is. An up-trending market, the trend line will be low therefore acting as support. If the market is trending down, then we’ll have the trendline placed above where the market price is. Therefore acting as resistance on the way down.

So as I said there’s basically two schools of thought in determining where to place your trend line.

  • Now, the first school of thought is that you can place them on the extreme points – the highs and the lows of a particular candle, determined by the wicks. So, in this case, you could plot a trend line going something like that so you’re looking at this wick here. The only problem in doing that is that you often find that the price is quite away away from where that particular trend line is drawn. That’s going to be the same if you’re plotting a downtrend in the market If you’re taking the wicks, we’ll take this wick from here to that wick there. And that would be your descending trend line.
  • Now, the approach that I like to take is to use the closing price and the best way to do that is by using the line graph. So here is the line graph. Now I’m going to use the same chart, I’m going to plot my my trend lines in using the swing lows and the swing highs on the line chart. And what you’ll see here is that price is going to be trading much much closer and trend lines. So now, going back to the candlestick, you’ll see that the Redline that’s using the line graph shows you price action much much closer to the trend line. 

Now I thought I could say there are two main advantages by using the closing price or the lying off approach enjoying your trend lines. First of all, if you’re looking to trade the breakout trade, that’s basically meaning a break of the trend line to go in the opposite direction using the line graph the approach will get you into the breakout much much sooner because the price is much more attune to that trend line. You’ll see here on the Redline, that was a line graph approach you get into that breakout to the downside much quicker than if you were to use the blue trend line approach which is on the wicks. The second thing is if you’re using the trend lines for dynamic support and resistance levels, then the price is much much more attune to that trend line giving you many more opportunities for a bounce off that trend line for the trend to continue in the direction of that.

As opposed to using the wicked approach or that the extreme approach where the price is often far away from where that trend line is. And as with support and resistance, trend lines can also be either major or minor. Now, the major trend lines are going to be found on the higher time frame chart.

Now, with inside major trends, you can have minor trends. So you can have minor trends inside major trends. It’s worth noting which environment you are in- either major trend or a minor trend. Another way that some traders look at the trend lines is to draw channels so they’ll have an upper trend line and a lower trend line to form a channel to give an indication of potential price reversals from above and below support and resistance in a trending market. 

“Congestion Area” or “Trading Range”

  • A congestion area occurs when prices move sideways, fluctuating up and down within a well-defined range for a considerable time period 
  • A congestion area signals that the forces of supply and demand are evenly balanced. 
  • When the price breaks out of the congestion area, above or below, it signals that a winner has emerged – A break above is a victory for the bulls (demand) and a break below is a victory for the bears (supply).  
  • When the price breaks out of the congestion area by penetrating the support it is a signal to sell. 
  • When the price breaks out of the congestion area by penetrating resistance it is a signal to buy. 
Note: If a support or resistance level is broken, it signals that the relationship between supply and demand has changed. 

“Support and Resistance”

  • A support level is a price level at which there appears to be substantial buying pressure to keep prices from falling further.
  • As the price declines towards support and gets cheaper, buyers become more inclined to buy and sellers become less inclined to sell & by the time the price reaches the support level, it is believed that demand will overcome supply and prevent the price from falling below support. 
  • Support can be established with the previous reaction lows. 
  • A resistance level is a price level at which there appears to be substantial selling pressure to keep prices from rising further.
  • As the price advances towards resistance, sellers become more inclined to sell and buyers become less inclined to buy & by the time the price reaches the resistance level, it is believed that supply will overcome demand and prevent the price from rising above resistance. 
  • Resistance can be established with the previous reaction highs.
  • Another principle of technical analysis is that support can turn into resistance and visa Versa. Once the price breaks below a support level, the broken support level can turn into resistance. The break of support signals that the forces of supply have overcome the forces of demand. Therefore, if the price returns to this level, there is likely to be an increase in supply, and hence resistance.
  • The other turn of the coin is resistance turning into support. As the price advances above resistance, it signals changes in supply and demand. The breakout above resistance proves that the forces of demand have overwhelmed the forces of supply. If the price returns to this level, there is likely to be an increase in demand and support will be found. 
Caution:

If the corrective dip in an uptrend comes all the way to the previous low or breaches it, it is an early signal of reversal of a trend (downward move) or beginning of a sideways movement.


Confirmation:

The more the trading that takes place in the Support or Resistance area, the more significant it becomes. The amount of time spent in the support or resistance area is a sign of better confirmation. The volume also acts as a pivotal point in the determination of better future prices and confirms better the support or resistance levels.

“CRITICISMS OF DOW THEORY”

  • Dow theory generally misses 20% to 25% of a move before generating a signal.
  •  Signals in Dow theory are generally generated during the second phase of the uptrend.
  •  It was primarily used as an indicator of Economy which was substituted to stocks and other underlying assets.
  •  Subjectivity and difficulty in distinguishing the various phases of trends.
  • An investor is more concerned about his investments, rather than just depending upon the movements in market returns.
  • It may not help a trader following intermediate trend.

“Investing is 60% common sense & 40% skills”

One article on times of India today draws my attention which stated that there is a record-breaking sale of liquor in December 2019 when in whole India is screaming “recession”. Last December happens to be the second coldest month ever since 1901 but you know what that’s just an excuse because if you observe data for a longer time you will have your answers.

                                  The picture was taken from The Times of India

Liquor, cigarette, gambling is some basic behavioral pattern of human beings which has no changes from the day we started to use them. So as long as human beings are here these habits will not change & being an investor you have to choose a stock which products have a good future and there will be always good demand so that the company post a good balance sheet and being an investor you get some part of it through price appreciation & dividends. 

Investing is 60% common sense  40% skills. Basic Behavior of human beings never changes that’s why you can see “Phillip Morris” & Diageo has given best returns in the last 100 years on the US stock market in spite of having so many regulation issues from time to time.

So if you want to be a good investor you much see the future because balance sheets can change in a few quarters or years but if the company has a problem with their product than that a big worry no matter how good the balance sheet looks like.

“SWING FAILURE” (REVERSAL)

The rally at point B is higher than point A, but the rally at point C fails to exceed the previous rally at point B. This indicates reversal of uptrend and the point below the neck line i.e. D – E indicates a failure swing.

The rally at point B is higher than point A, and the rally at point C is higher than that of rally at point B; But it falls below D and few theorists sells at a break out Point below E.
While others would like to wait to see a lower high at point G to confirm the lower high as well as lower lows and then sell at a Point below H.

FOCUS ON “MAJOR TRENDS”

  • Dow suggests focussing on the big picture i.e. to focus on the MAJOR TREND. The major trend consists of three phases
  • Namely:
  • ACCUMULATION PHASE.
  • PUBLIC PARTICIPATION PHASE.
  • DISTRIBUTION PHASE.
  • Accumulation stage is generally caught only by farsighted investors, technical traders catch the Public participation phase and markets have said to have reached the distribution phase when markets boil with financial good news making the front page. It is also indicated by the high speculation stage with cats and dog shares moving with high volumes and price without fundamental backing.
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