Every star-gazing kid knows the Big Dipper, with the two stars of its pan pointing toward the North Star. The equivalent for stock-chart gazers is the cup-with-handle base. It is one of the most common consolidations charted out by leading stocks, and the one which often generates the most successful rallies.
Look at Apple (AAPL) from October 2003 to February 2004. Its early March 2004 breakout led to a gain of 1,418% in 199 weeks.
China-based search engine Baidu (BIDU) formed an extremely deep cup-with-handle from May 2008 to July 2009 (the S&P 500 dived 53% during the same period). As the market turned up, Baidu broke out and ran up 690% in 119 weeks. During that same period, Netflix (NFLX) formed two cup-with-handles. It broke out from the first in January 2009 and sprinted 743% in 128 weeks.
These kinds of winners are what make cup-with-handle patterns very important finds for the growth investor.
The pattern's basic requirements start with a run up of at least 30% before the stock turns down into a consolidation. The consolidation (the decline from the stock's high) can be up to 35% deep, but tends to range from 12% to 33%.
The base must be at least seven weeks long, including the handle. They usually form over a three- to six-month period.
In the handle, the midpoint of the handle's high and low marks should be above the midpoint of the high and low of the left side of the cup. Handles that form too low present added risk of failure during breakouts.
Handles must be at least five days long, and typically last for several weeks. The art of qualifying handles is a study in its own right, involving metrics of depth, volume and "wedging" action — all of which can indicate strength or weakness in the pattern.
Mark the buy point by adding a dime to the left-side high mark of the handle.
In the case of BlackBerry (BBRY) in April 2003, the buy point was 15.96. The stock had formed a five-month cup-with-handle base. The depth was 36% — toward the deep side, but normal for a growth stock, given the 17% pullback in the S&P 500.
The stock's relative strength line corroborated the strength, rising to near 52-week highs ahead of the breakout.
Waterloo, Ontario-based BlackBerry, originally named Research In Motion, was the first to cross the line from simpler personal assistance devices into smarter tools incorporating constantly connected email and Internet, as well as calendars, stock trading platforms and small but comprehensive keyboards, among other perks.
The Blackberry launched in April 1999. By the beginning of 2000, the devices counted more than 2,000 companies and 15,000 users among the subscriber base. Blackberry climbed to more than 600,000 subscribers by mid-2003, on track to clear the one million mark early the next year.
That all fed the excitement that helped drive BlackBerry past its buy point in moderate trade on April 23 (please see a daily chart). It pulled back slightly, mostly in unremarkable trade, in three of the next four sessions. It then mounted a decisive advance, the beginning of a 1,149% advance over the next 85 weeks.