Take all the stock market winners over time, and the most common chart pattern found before their major price moves is the cup-with-handle base.
An essential component in mastering how to buy stocks is chart analysis and identifying bullish price patterns.
Chart bases help identify periods when demand for a stock is growing, and pinpoint the ideal time to buy.
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How To Buy Stocks: Cup-With-Handle Traits
The cup-with-handle gets its name from the general shape of the pattern.
The stock should have climbed at least 30% before coming to a top. From there, the stock declines between 12% and 33% from the peak to the bottom of the price contraction. During this decline and recovery, the stock forms a U shape. That's the "cup" portion of the base. A V-shape cup is a sign of a weak pattern.
After climbing back near its prior highs, the stock pulls back one more time. This smaller consolidation is the "handle" of the pattern.
A handle should form in the upper half of the whole base and above the stock's 10-week moving average. Its function is to shake out the last of the weak holders before the stock makes its next big advance.
A proper handle is normally 8% to 12% deep and at least one or two weeks long. Volume should be drying up in this area. The top of the handle is the base's buy point. A normal buy range goes from the buy point to 5% above it. Buying in this range will help keep you from buying too late.
The total length of the pattern must be at least seven weeks long.
IBD MarketSurge pattern recognition tools are helpful in finding these bases.
Stock Market Winner Formed Cup With Handle
A10 Networks offered a good example of what can happen from a cup-with-handle.
The stock climbed 64% from its October 2023 low to a high of 16.46 in May 2024, so it had a strong prior uptrend. Shares sank as much as 25% from the May peak, forming a cup for about 20 weeks (1).
The network and product security provider then halted its recovery, dipping 5% over the next few weeks (2). This became the handle of the base. The 14.97 top marked the buy point (3). Shares retreated for three weeks as volume dried up in the handle (4).
The stock broke out in above-average volume (5) after the company reported strong earnings the week of Nov. 8. Its relative strength line was rising, another positive sign for the stock (6).
A10 stock climbed six straight weeks after breaking out and reached the 20% profit target in early December.
Follow Kimberley Koenig for more stock market news on X/Twitter @IBD_KKoenig.
