Welcome to Bravechart. Your in-depth article on chart analysis from a Scotsman stationed in the Outback.
As traders, we use technical analysis as a reliable method for speculating on future price direction of both equities (shares) and indexes. Technical Analysis in simple terms is the study of historic price movements in a chart in search of patterns or consistently traded support and resistance levels. Today we are looking at a specific chart pattern that falls under continuation patterns, the Cup and Handle.
Appearance: A Cup and Handle pattern is comprised of:
- A fall in the share price and then a rise back up to roughly where the fall started – creating a cup shape.
- A down trending channel starts to form after the cup – creating the handle (this should be roughly 30-50% of the ‘Cups’ fall).
- The breakout of the sideways to bearish movement and then a sharp rise higher once again. The volume should also accelerate after breaking out of the channel.
Important Note: Be aware, this pattern could be the stock taking a breather or the direction is about to change to head Bearish. Wait to see the reverse to the upside and make sure the volume starts to increase.
Example: Seek Limited (SEK)
A couple of months ago SEK showed this pattern quite perfectly. As you can see from the below chart, the share price fall at roughly $21.00, had a fall to create a low (support), then a rise back up to the $21.00 level. After the price reached this level, it started to fall slowly in a bearish channel pattern. After the price fell roughly 30% of the initial low (bottom of the cup), then the share price broke to the upside and accelerated up to $22.61. With this rise it continued the long-term uptrend that had been forming since 2015, thus completing the continuation pattern.
There are many ways that you could take advantage of these patterns. As a specialist in derivatives, we are able to profit on a stock when it falls as well as when it rises.
If you would like to learn how to pick a stocks direction, then Join us at our live face to face one day “Technical Analysis, Picking the Direction of a Stock” course.
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