The following chart of Pharmacyclics ($PCYC) illustrates what a flat base consolidation should look like:Īlthough the weekly chart above is a great example of a flat base consolidation, the pullback was just a bit over 15% at 17%. Flat bases usually correct no more than 15% off the highs.A flat base should be at least 5 weeks in length.The 10-week moving average should be trading well above the 40-week moving average.The majority of the base should form above the rising 10-week moving average (or 50-day moving average on daily chart). The best way to identify a flat base is by using the weekly chart timeframe.Typically, it will form after a breakout from a deeper correction (such as a cup and handle). As with the cup and handle type pattern, a flat base consolidation must form within an existing uptrend.This enables us to lower our average cost and provides a better reward to risk ratio.Ĭheck out our simple 10-step checklist to properly identify and trade the cup and handle chart pattern.Ī flat base consolidation is a shallow price correction that should possess the following characteristics: However, over the years, we have learned to establish partial position size at or near the lows of a handle, and add to the position on the breakout above the high of the handle. The buy point for this type of swing trade setup is a breakout above the high of the handle. The key to the handle is that price action should drift lower to shake out the “weak hands.” When the 20-day exponential moving average is above the 50-day moving average, and the price action is above both averages, it is the ideal time for a handle to form. The 50-day moving average (teal line) is above the 200-day moving average, and the 20-day exponential moving average has crossed above the 50-day moving average. On the chart above, notice the 200-day moving average (orange line) is in a clear uptrend. Putting it all together, this chart of LinkedIn ($LNKD) shows a valid cup and handle chart pattern, based on the technical criteria above: Handles should be at least 5 days in length and not form below the 50-day moving average.Handles that retrace more than 15% are too volatile and prone to failure.
The handle itself should drift lower, and is typically 5-10% or so in width.The handle usually forms 5-10% below the highs of the left side of the pattern. As the base rounds out and the price returns back above the 50-day moving average and holds, be on the lookout for the “handle” to form.The base typically forms on a pullback of 20-35% off the highs (deep correction), and is at least seven weeks in length.The 50-day moving average should be above the 200-day moving average, and the 200-day moving average should have already been trending higher for at least a few months.Stocks that are breaking out to new all time highs are ideal because they lack overhead resistance. Do not go looking for cup and handle patterns with stocks trading at or near 52-week lows! The best cup and handle patterns form near 52-week highs. The chart pattern must form within an existing uptrend, and stock must be at least 30-40% off the lows.
#Stock chart patterns how to#
How To Identify A “Cup and Handle” Chart Patternįollowing are the technical characteristics of a cup and handle pattern, along with an actual visual example:
#Stock chart patterns series#
They occur when a stock’s price falls, then consolidates over a series of weeks or months. For stocks, base patterns serve as that foundation. It’s sort of like the foundation for a house if it’s not solid, the levels above can become unstable.
Before a stock can launch a big price run up, it must first have a solid base pattern to build upon. Stock breakouts are about more than simply buying stocks that are trading at new highs. In order for a breakout to be valid and without a high risk of failure, a stock must first possess a valid base of consolidation on its chart pattern.Ī base is crucial to an uptrend, as the stock or ETF builds a strong foundation to launch the next advance.
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