Reading Stock Charts, Part II, continued
Recognizing The Saucer With Handle
The saucer with handle is the cousin to the cup with handle. The main difference is that the "cup" portion is more shallow and runs longer, resembling the side view of a saucer. Like with the cup with handle, this pattern reflects a temporary period of diminished enthusiasm about a stock. The price falls, though not as fast in time or as steep as seen in the cup with handle (just 12% to 20%), then climbs back to a point short of its prior peak. Next, it goes into a period where the price moves little or drifts down, forming the "handle." Finally, the stock breaks out to new high ground on heavy volume, heralding the return of professional investors into the stock. This is the buy, or pivot, point. The whole pattern takes at least eight or ten weeks to form, but is usually somewhat longer.
Check this example of Home Depot from 1996 and 1997.
- The stock was making some progress until it peaked in October 1996 (point 1).
- Over a 23-week period, Home Depot's price fell 18% from the peak (point 1 to point 2).
- The stock recovered to get close to its old price high, then it formed a handle over the next seven weeks (point 3).
- Finally, the stock broke through to new price highs as volume swelled (point 4).
From this point, Home Depot shares surged about 400% over the next 32 months. The company, seizing on baby boomers' desire to fix up their homes, expanded into the world's largest chain of home-improvement super stores.
This pattern may be increasingly difficult to find, because higher market volatility has reduced the number of stocks that move in slower, tighter, saucer-like price ranges.
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