Nothing taxes the soul like having to wait. The test can be double to an investor, for whom waiting can also risk missing a breakout and gaining entry to a winning run.
So God invented handles.
In stock charts, handles occur most commonly at the end of cup bases. They form less often on double-bottom and flat bases. But in nearly all cases, they offer an earlier entry into a rising stock.
No matter the type of base, a handle must be at least five days long. Start counting on the first down day. Mark the buy point a dime above the highest intraday high etched along the handle structure. (This high mark sometimes appears on a day before the five-day handle count begins.)In a cup base, the midpoint between the handle's highest and lowest price points must be higher than the midpoint between the highest and lowest points marking the left side of the cup. Handles that fail this test may still be useable, but carry added risk.
A handle should also form above a stock's 10-week moving average. In the best handles, the price lows drift lower in declining volume. Upward wedging handles along the lows signal the weak underlying shareholders may not be shaken out, and the stock's supply-vs.-demand profile may not be ready for a market-leading run.
Handles aren't perfect formations. It's good to keep in mind that if we look back over the past few years, the performance of some highly rated stocks that formed handles on flat and double-bottom bases was not stellar.
The reason may have more to do with the fact that a stock had already made many bases. Plus, the bulk of recent double-bottom-with-handle breakouts occurred at or near market tops, or in stocks with further consolidating to do before breaking out into winning runs.
A great stock will set up a new base. Take Apple (AAPL), which cleared a 208.10 buy point in a flat base with handle in December 2009. It immediately pulled back more than 8%. But it then formed a six-week cup and launched into its multiyear advance.
TransDigm Group (TDG) topped a handle buy point of 108 in a flat base on April 12. The handle formed low in the base, and the breakout occurred in soft trade. But investors who bought at the handle buy point were rewarded, as the stock gained 31% by last month.
Another recent example: Martin Marietta Materials (MLM), which cleared a flat base with handle at 90.52 on Nov. 29.
Handles on some double-bottom bases have shown more dubious results. Bucyrus International staged a weak but ultimately successful breakout from a double-bottom-with-handle base in October 2007, before it was acquired by Caterpillar (CAT).
MEMC Materials (WFR) cleared a double bottom with handle in late October 2007. It rose briefly before slipping into a multiyear decline.
Natural gas producer XTO (acquired by Exxon Mobil (XOM) in 2010) cleared a double-bottom-with-handle base in weak trade in July 2006. The stock soon slipped into another base, which could have been read also as a double bottom with handle. XTO eventually mounted a 104% advance from its original double-bottom-with-handle buy point.