To start off with, you need to know that I am NOT an expert or stock pick advisor, and everything that I write about is simply just my own opinion from what I’ve learnt along the way.
You should ALWAYS trade with your own thesis and plan that you believe in, and NEVER trade with someone else’s idea unless you understand it and come to the same agreement as them.
I may not even be totally correct with my thesis or trading ideas, but from what I’ve studied and the techniques I’ve learned, the cup and handle pattern will be one of my chosen strategies that I use to profit from.
~Trust no one’s trading idea unless you understand it yourself~
Let’s begin with this trading idea then.
So first off you have to wait for this pattern to start forming, but when it does, you have the opportunity to profit from it, as the cup and handle pattern is one of the most predictable patterns to trade.
The main key to being able to spot any technical chart pattern is to be prepared.
You MUST ALWAYS be prepared before you trade, and by being prepared you need to have done your research and homework on EVERY stock before you consider trading it!
There can be many different time frames on the cup and handle pattern, whether it be over a yearly period, monthly, weekly, daily or even hourly period.
I will personally be sticking to the daily time frame as it fits my strategy best overall. I choose to trade this pattern more so on a daily time frame as I am not a long term investor or a bag holder as it is more commonly known for those that hold forever no matter what happens!!
I like to get in and get out as quickly as possible with my exit plan in place BEFORE I enter ANY trade.
If you take a look at the chart below of $KERX, you can see my scribble of the cup and handle fully formed.
In order to profit from this pattern you need to be ready and wait to “Dip Buy” as the “Handle” starts to form, and when the candle is in the green.
My Scribble of the Cup and Handle Pattern on $KERX
Here’s How To Profit From The Cup And Handle Pattern
So the best time to dip buy once the “Cup” is in place and the price is slipping back down is when the share price hits support and goes into the “Green” and looks to be closing at a higher price than the previous day.
You can either wait for the market open to see if there is any price action or you can wait towards the end of the trading day and enter your trade near or just before market close, but only if the share price is in the green from the previous trading day and preferably with at least a similar amount of volume to the previous day. There must be adequate volume to justify price increase and support.
$KERX is a good example of this technical pattern, but what happened with $OREX just below was even better, and I will explain why.
$OREX is an excellent example of the Cup and Handle Pattern
This is What You Need For This Pattern To Work Best
First of all there are 3 main things that you need in place in order for this pattern to work best, and they are:
- High % of short sellers (More than 10%)
- Important News (Billionaire Investor, Big Contract OR Positive Earnings Release)
Without these 3 key elements in place, there is a higher risk of this strategy not going to plan! Of course there is never any guarantee in the stock market as to what happens next, but the fundamentals of this set up gives you the advantage to profit from more consistently when this pattern occurs.
Interestingly enough $KERX didn’t have any recent important news out until the 15th October, even though the “Handle” started to form on the 14th October. However you still had the opportunity to take advantage of this pattern on the 15th October, as there was a high percentage of shorts in position that would be covering due to the important news release on the 15th.
You can potentially try this pattern out with no important news release, but I personally like to trade ONLY when there is a catalyst that ignites a certain movement. In other words, there has to be a reason for the stock to go in the direction that you want it to.
With $OREX, even though it reacted in a very unusual way to the news release on the 9th October this has got to be one of the best case scenarios and would have been the perfect trading opportunity.
The news was actually released right after the market close on the 9th October which was a Friday afternoon, so a lot of traders most likely didn’t catch the news until after the weekend.
You had to wait until Wednesday the 14th October for the “Dip Buy” where support was found and your Long entry would happen just before the market close on that day. So Patience is very important to make this trade go successfully.
You mustn’t try to predict where support will be, but just wait for support to occur naturally and it must be a New Higher Low from the bottom point of the cup also.
If I had traded $OREX I would have gone Long on the 14th October around $2.45 just before market close and planned my exit near the 3 dollar mark which would have happened on the 15th October.
With $KERX there would have been a tougher decision to make as the candle actually closed 4 cents in the Red on the 15th October, so I would NOT have placed a Long trade, but more likely waited for the next day to potentially be Green. Interestingly, another key factor to keep an eye on is volume.
So even though $KERX closed slightly lower than the market open, the high amount of buying volume was a very good indicator of a price increase about to occur.
Volume is a good sign of activity of the buyers and sellers, which can tell you whether the bulls are in favour or the bears.
Now the Cup and Handle pattern doesn’t always look exactly the same as you can see with both of these charts, but the approach with this trade is identical. It was actually the billionaire Seth Klarman that made both of these stocks react like this.
So instead of waiting for the breakout to occur to place your trade, wait for the Dip Buy in the anticipation that shorts are highly likely going to cover their positions given the support found and MOST importantly the news release of the Billionaire investor just announced.
I’m excited to test this strategy out for real, but of course I have got to wait for this pattern to occur by keeping an eye on stocks that have a High percentage of short sellers in play and then just wait for any juicy news to be released, while also waiting for the support to naturally occur in order to Dip Buy.
Spotted A Potential Cup And Handle Pattern
$ZINC is a potential play right now, with the date being 25th October 2015. Let’s see what it does and how much it gets squeezed if any price action occurs. It does have a bit of an unusual news release though with uncertainty, so I would wait for price action and volume to pick up if I were to consider trading it.
Now that it’s the following day that being 26th October 2015, $ZINC plunged right from the start of the market open and here’s why:
If I read the sec file fully I would have realised that there was zero positive factual news!
Looking at the unusual news release again, it is actually a good example of why positive news is required to get a predictable short squeeze. The news was Bull Shit really as the information simply had no real positive facts at all.
It only had rumours of possibilities that could happen any time in the future, but nothing is guaranteed.
You should NEVER trade rumours, ONLY TRADE FACTS!
My lesson learnt is to read news and sec files better and NOT just skim through which is what I did.
So if you read the whole sec file, with besides the rumours at the beginning of Stifel, Nicolaus & Company maybe selling shares as an agent, it actually says that the company has gone through difficulties with production of zinc and has had minimal production due to issues with the equipment, as well as the possible future danger of competition being cheaper elsewhere around the world which would slaughter their share price!
So overall the news is rather negative and would need some seriously good news to make it spike and get the short squeeze.
It would have been a great short opportunity though, but I’m not ready for that side of trading yet as I need to get the hang of consistently profiting from going Long first. Another great lesson learnt though. 🙂
$ZINC Is A Great Example Why “Positive News” Is Key
I’m glad I came across $ZINC while scanning for potential short squeeze plays, as although it has a high % of shorts, a good chart pattern and enough volume, what it lacks is positive news.
$ZINC is a good example of why you need positive news to get a predictable short squeeze. The other lesson here is to be sure that you read the news/sec file properly and fully understand everything that is said as well as what it means.
$ZINC will be a good one to keep an eye though, as there will be a short squeeze somewhere along the line, but maybe not as a cup and handle pattern.
So there we have it. This is my opinion on the Cup and Handle pattern and we shall just have to wait and see how it plays when I get the chance to try it out for real sometime.
So remember, for this pattern to work BEST you need:
- Positive News
- High % Shorts
- Increasing Volume
Again I am writing all this to learn and train myself at the same time, as though I was trading for real.
Just so you understand I don’t finish my day job until Friday 13th November 2015 and plan to start trading on the 16th November 2015.
Only 15, nope scratch that… 14 “working days” left to go now and everything then becomes a reality! 🙂
Until next time, enjoy what you are doing OR change it if your not!!
You will find a way, but only if you really want to!
To me Freedom is the ULTIMATE Wealth and money is simply the oxygen you need to breath it!!