TECHNICAL TREND ANALYSIS & CHART PATTERN RECOGNITION
Identifying chart patterns is simply a system for predicting stock market trends and turns!
Hundreds of years of price charts have shown that prices tend to move in trends. (I’m sure we’ve all heard the saying, ‘the trend is your friend’.) Well, a trend is merely an indicator of an imbalance in the supply and demand. These changes can usually be seen by market action through changes in price. These price changes often form meaningful chart patterns that can act as signals in trying to determine possible future trend developments.
Research has proven that some patterns have high forecasting probabilities. These patterns include: The Cup & Handle, Flat Base, Ascending and Descending Triangles, Parabolic Curves, Symmetrical Triangles, Wedges, Flags and Pennants, Channels and the Head and Shoulders Patterns. In my opinion, these are some of the best patterns to trade.
This section is designed to introduce you to some of these chart patterns, as well as teach you to identify repetitions in the market qualities, to make timely and more accurate decisions when predicting market trends.
THE CUP & HANDLE PATTERN
The Cup & Handle is the corrective action after a powerful stock advance. Generally a stock will have a powerful move of some 2 to 4 months, then go through a market correction. The stock will sell off into the correction in a downward fashion for maybe 20 to 35 percent off the old high point. The time factor is generally anywhere from 8 to 12 weeks depending on the overall market condition.
As the stock comes up to test the old highs, the stock will incur selling pressure by the people who bought at or near told high. This selling pressure will make the stock price drift in a sideways fashion with a bias to the downside for about days to 3 weeks.
The handle is generally about 5% below the old high point. A handle that is any lower is generally a defective stock and contains higher risk for failure.
The time to buy the stock, is as it emerges into new highs at the top of the handle and not the old high point set some 8 to 12 weeks ago.
I have found some of the biggest stock market winners have this very powerful formation. It is one of the best and most reliable formations to look for. However, it is important to note that the best stocks with this formation are found at the beginning of a market move after a good market correction, and not during, or at the end of a major market advance.
HERE IS A SAMPLE CHART WITH A CUP AND HANDLE FORMATION