INVESTOR'S BUSINESS DAILY
The cup-with-handle is the most common winning chart pattern. But at the start of a bull market, also look for its less common variation: the cup-without-handle.
The cup-with-handle base gets its name because its outline forms the silhouette of a coffee cup. The downward-sloping handle at the end of the base shakes out the last weak holders before the stock make its big climb.
But sometimes a stock doesn't wait to take a breather. In this case, it scales the right side of its base and shoots straight into new high ground without pausing.
This pattern happens most often at the start of a new rally. When the major indexes launch higher off a bottom, they carry some stocks along without time for a last shakeout.
A number of stocks formed this pattern when the market rallied after the Sept. 11 attack. Many volatile tech stocks produced such bases in 1999 and 2000.
The lack of a handle makes it tough to spot the pivot point. Normally, the pivot is the handle's high plus 0.10 point. You buy if the stock surpasses this point, most often on unusually heavy volume.
In a cup-without-handle base, the buy point is 0.10 above the area where the stock repeatedly failed to move higher. That's usually the top of the base's left side.
Cups without handles have a somewhat higher failure rate, but they can work. Make sure the base has other strengths in its favor. Look for a smooth overall shape, more up weeks than down weeks on above-average volume, weeks of tight price ranges and high-volume support at the bottom.
The pattern is much more likely to fail if the rally collapses, as has happened repeatedly in this long bear market. As always, sell immediately if the stock falls 7%-8% from your buy point.
American Woodmark was cruising along last summer. The cabinet maker more than doubled from April to August 2001 even as the Nasdaq composite declined 11%. It then began shaping a second-stage base.
The stock fell hard (see point 1 on accompanying image) when the market reopened after the Sept. 11 attack. It bottomed at 26.18, a 50% correction, then began climbing the right side of its base.
In the week ended Dec. 7, American closed near the top of its range on strong volume, a bullish sign (point 2). But instead of forming a handle the next week, it surged past its high of 52 on fast trade (point 3). That was the time to buy. At the time, earnings grew 55%, 41% and 121% the past three quarters. American gained 40% from pivot to peak, topping in March 2002.