@Capsule91 I am not familiar with 99% of patterns. I came to know about Cup and Handle due to my constant reading of Bill O Neil and his follower’s books and articles. I can share what I do. I use basic data as price, volume, time and build a story with fundamentals. I write it down how the story will unfold in coming days. Initially my story scripts were way off mark (still too I guess). But it has improved my process to some extent as time progresses and mistakes identified ongoing basis.
I am apologizing to disappoint on your expectation to start with. But what I could do today afternoon, sharing a new story just wrote on one of your example Mindtree. This is how I go about.
Coming back to your cup and handle, let me share with you something. I was fortunate to be present in IBD meet back in 2006 and 2011. Bill (William) O Neil was categorically clear, he is not trying to tell people to find a cup and handle. Rather to understand different crowd behaviour against a stock and why. For educational purpose and his 100 years of research created a visual thinking inside his brain which looked like a cup and handle to him. The same pattern looked like a ‘decelerating T’ to Mark Minervini. For David Ryan it was ‘Ants’. Please note both David and Mark are protege of Bill O Neil. Needless to say, Bill O Neil is a legend who swiftly use right brain. We may not be at that stage to use visual thinking like either S curve or Bell curve.
Bill O Neil realised for every stock to go up require to rest, get a momentum to move up and again rest before starting upwards. Every momentum will require major buyers (powerful crowd) to take it up. And if these powerful buyers hang on to their decision the stock will display a steady nature at base as it finds support from powerful buyer. Due to the timing of involvement of powerful buyer’s stock will rotate within less powerful buyers till the time again powerful buyers join in. Powerful buyers are big volume buyers i.e. he called them institutional buyers (I in CANSLIM). Post a powerful buying stock reduces its action i.e. both price and volume. It contracts due to retail involvement till it come to stage buyers and sellers disengaged from stock and move somewhere else till powerful buyers comes in again. So, all handles should form in upper part of base, better if does not slant too much (either upward or downward). If it slants too much it means daily fluctuations in price range is high and not contracting.
Now imagine which company will attract large buyers for long time? The growing companies which throws up surprises i.e. acceleration in earnings, revenue or margin. Can we apply this to turn around company? Yes, only after company is stabilised. Initially it may be parabolic movement started with sudden euphoria.
Now, shapes are in eyes of beholder. Even if there is nothing still we can create a visual impression anywhere. A trend can look up in 3 months chart, same will look down in 1year. My suggestion is two aspects a. triangulate further data for underlying structure. b. identify crowd behind structure.
Fair enough, my views on Mindtree:
Primary trend: Stage 2 (Base Count 1 forming)
After stage 4 ended in month of Nov 2016, stock started consolidating (Stage 1) before forming new base and stage from Sep 2017. Good news, beginning of an uptrend. Do note how 10WMA (equivalent of 50DMA) is unbroken since Sep 17. And the green bars within base. This shows strong accumulation and positive sentiment. Lots of institution use 50DMA for support, reason is a 50DMA is historical pattern of short term mean reversion.
Now current situation:
See the base, starting from 18 Jan 2018. Stock corrected from 784 tops to 683 forming first contraction i.e. 13%. Second contraction 750 to 687 i.e. 8%. Along with price contraction volume contracted from 5/6 million a day to 1 million, before a very thin volume on 20 Feb- 480K! Stock zoomed next day with 5 times more volume and continued till now with additional buying. Can this be a cup and handle for pattern? Rather it’s a saucer pattern without handle (no contraction in end, as handle formed above pivot).
Pivot was around 565, that was the point it could have been bought for a high reward trade. Alternatively, second buy point would be 765 plus for current contraction around 50DMA. Of course, this does not include pullback entries. But coming out of a 4-week base with two contraction I would be hesitant to take fresh entry.
Can I triangulate with both S curve (fundamentals here as we have used technical as first variable) and Bell Curve (crowd participants)? Let us give it a shot with two key parameters (though I would like to include few more parameters like competitive advantage, ROE etc. I guess we are not getting too fundamentally here).
EPS Acceleration in last six quarters- -40%, -32%, -38%, -2%, 32%, 41%
Sales acceleration in same period- 11%, 7%, 0%, -3%, 3%, 6%
If we see EPS what a comeback, from a de-growth which touched -40% six quarters back now running at reverse positive number i.e. 41%. This bottom line is not emanating from organic revenue expansion. Expect one quarter revenue is flat for last five quarters.
Obviously, it’s not crystal clear from gunshot. But hang on, there has been increase in fund houses in from 24 to 25, but importantly shares held by them has gone up by 22% plus. Almost 90 lacs shares have been added by funds recently.
So, institutions are buying, why? I would love to know whether this trading activity or investing activity. I use one type of fractal for this, Multiple Moving Averages (a spread set of moving averages – for more go through Daryl Guppy basic concept of GMMA and customise).
Investors has been steadily buying since Dec 17, and confidence can be seen as long term moving averages has expanded big time towards middle of Jan 18. Even if traders started selling around Feb 1st week they couldn’t dent confidence of investors who consistently supported the trend. We can see traders rebound last week without penetrating investors (applying more pressure). The gap between long term and short term is steady, this shows good trend strength.
In a nut shell trend strength is good and supported by investors. And we have triangulation from that institution are buying. Meaning can be lots of positive news fundamentally. I am not tracking this stock. But it can be for example:
|-|Changing landscape in business and competitive advantage of company|
|-|Support from industry group |
Now if we can build a story on both curves we know what we are expecting from a stock in future. Same contraction, sellers selling supported by additional buyers forming bases so on as we discussed above.
Note: If we see Mindtree we can notice a lots of accumulation on right side of chart i.e. recently. From swing trading perspective this deserve attention (could have been better close to pivot). For position trading I would still do another day or two day’s work to find out more behind this accumulation story.