For Tea Lovers: Study Cup with Handles for Your Investments
By Saghir Aslam

 

(The following information is provided solely to educate the Muslim community about investing and financial planning. It is hoped that the ummah will benefit from this effort through greater financial empowerment, enabling the community to live in security and dignity and fulfill their religious and moral obligations towards charitable activities)

As I have written earlier there are different ways to invest. Two of the most common are Fundamental and Technical. Pick out some stocks that you like, get the charts, study them. Look them over thoroughly. Once you think you have learned it well practice on your favorite stocks as paper trades. Learn to spot bullish chart patterns such as the cup-with-handle, and you'll take a vital step toward successful investing.

The first part of investing is straight-forward. Put together a list of quality stocks. Your next move is one of timing. Not only do you need to find the very best companies, you also must buy your stocks at exactly the right time in a rising market.

Ignoring this part of the investing equation can be devastating. Buying a stock in the midst of a downtrend can put you on the slippery slope to more losses. You also can get hurt doing the exact opposite: A stock that has made a long, steep run-up can roll over and crush you.

The cup-with-handle price base helps solve this problem by showing you exactly when to buy.

The savvy trader doesn't try to "catch a falling knife" by buying a stock in a downtrend. He waits for bargain hunters to move in and take the risk of stopping the stock's fall.

When is the proper time to buy off a cup-with-handle? You should pull the trigger once the stock moves one-eighth of a point above the peak price in the handle. Don't hesitate. Traders call this the pivot point. Once a stock clears it, the price can move very fast. Delay, and the stock may extend beyond a safe buying level. Don't chase stocks that are more than 5% above their pivot. Sometimes the stock will hit a new high at the same moment. This is good but not essential as long as the handle formed in the upper half of the base.

Spotting a sound cup-with-handle base takes a practiced eye. But with some effort, you can tell the difference between a stock that's a fine piece of china and an everyday dish. The price base often signals the start of a major advance in a quality growth stock.

The cup-with-handle base shows you precisely when to time your purchase. The basic idea is to wait for an advancing stock to undergo a correction. Then buy your shares as the stock recovers, proving its mettle on the battleground of the market.

There is a lot to learn in order to spot sound price bases from faulty look alikes. But don't feel discouraged. Traders master this stuff by examining hundreds, even thousands, of stock charts in times of rising, falling and flat markets. You can do the same by searching for bullish price bases in the dozens of stock charts.

The price base should span no less than seven weeks from a stock's last intraday high before its correction through the end of the handle. Shorter bases tend to fail.

Most cup-with-handle bases run 10 to 12 weeks, a trait that seems to correspond with the 13-week quarterly reporting period. Many of the biggest advances tend to spring from bases in the 20- to 30-week range. And some price bases can take a year or more to complete. Such long bases usually coincide with bear markets or severe corrections within market sectors.

A normal stock declines 20% to 30% from the pre-correction intraday high to the absolute low of the cup. Steeper declines suggest weakness. During full-blown bears markets, you might accept a 40% or 50% decline if the stock made a huge prior advance.

The downward phase, or left side, of the cup should take at least a couple weeks. You want the correction to really scare out weak shareholders.

Trading volume should drop off during the lows of the cup. That's a sign that selling has dried up. The correction has chased out most everyone who is going to sell. A spike in volume with stock refusing to budge much lower is also a good sign. It indicates buyers are stepping in to support the stock.

Volume should pick up as the stock rebounds, then dry up as it forms the handle, again signaling that selling has abated.

A stock should trade in a fairly tight price range during the handle. The handle should angle downward. The handle should not drift upward or move straight sideways, as marked by the daily price lows. Such upward-wedging handles are failure prone.

The handle should form in the upper half of the cup. You can calculate the midpoint by adding the pre-correction high to the absolute low. Then divide by two. The middle of the handle should be above the cup's midpoint.

Try Investors Business Daily. I love this paper. It is easy to read. It has terrific ideas and is always on top of the market. Naturally there are other charting services available including your internet.

All of this information is available in Investors Business Daily. IBD does a terrific job. It may sound like a commercial but Investors Business Daily has helped me a lot in my Investing on both major ways to invest: Technical and Fundamental.

Search, Research and some more Research then start. I pray that almighty God helps us succeed in this world as well as in the hereafter.

(Saghir A. Aslam only explains strategies and formulas that he has been using. He is merely providing information, and NO ADVICE is given. Mr. Aslam does not endorse or recommend any broker, brokerage firm, or any investment at all, or does he suggest that anyone will earn a profit when or if they purchase stocks, bonds or any other investments. All stocks or investment vehicles mentioned are for illustrative purposes only. Mr. Aslam is not an attorney, accountant, real estate broker, stockbroker, investment advisor, or certified financial planner. Mr. Aslam does not have anything for sale.)

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Editor: Akhtar M. Faruqui
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