You've identified a stock market leader. The company has strong fundamentals with big earnings growth in the latest quarters, and the stock chart displays powerful price action. Next, you need a proper buy point. That's when to look for a "handle" in the chart.
A handle offers a lower entry than a plain new high, yet handle formations have proved themselves to be reliable entry levels. Handles can appear in cup bases, saucers and double bottoms and are relatively minor dips that occur as a stock nears new highs.
A proper handle needs to be at least one down week on a weekly chart, or five days on a daily chart. It should form in the upper half of the overall base, typically forming above a rising 50-day (10-week) moving average.
A handle that forms in the lower half of the base is faulty and more prone to failure. If the handle's position in the base is not clear, take the high and low of the handle area and divide it by two. Then take the high and low of the base and also divide in half. The result for the handle should be higher than the base's.
Handles should be no more than 12% deep from top to bottom in bull markets, otherwise it's considered too risky. They can go as deep as 20%-30% in bear markets and still work, if the general market starts a new major uptrend, IBD founder William O'Neil wrote in "How to Make Money in Stocks."
A proper handle should drift downward, creating a shakeout of weak holders. Volume should also dry up in the handle, indicating a lack of institutional selling. Several weeks of tight trading is another bullish characteristic.
How To Buy Stocks: DoorDash's Handle
During the summer of 2024, IBD Leaderboard stock DoorDash rebounded up the right side of a cup base, reclaiming the long-term 200-day moving average. The stock was recovering from a consolidation that started in March. This was the "cup" of the cup-with-handle base. (The entire base is not shown in the accompanying image.)
Shares then drifted lower for the next four weeks, etching a handle onto the cup base (1). The buy point is the highest level in the handle area, or 131.21 in this case (2). That's lower than the 143.34 buy point if the stock had not formed a handle.
DoorDash's handle contained a number of bullish characteristics. Its depth was only 7%, easily less than the 12% max.
There was a tight price action in the handle. That's a sign of institutional hands at work in the stock. Finally, the lows of the handle held above the 50-day moving average (3).
In mid-September, DoorDash stock broke out past the 131.21 buy point. Since then, the stock has run up nearly 20% from the entry. Remember to take at least some profits at the 20%-25% level.
Be sure to follow Scott Lehtonen on X at @IBD_SLehtonen for more on growth stocks, the Dow Jones Industrial Average and the stock market today.
