Why Cup With Handle Works In Overseas Stock Markets Too

Investor's Business Daily

You hear skeptics say cups with handles, double bottoms and other winning formations are statistical flukes that will disappear once enough investors begin exploiting them.

Not so. They work at all times and in all stock markets. And the reason is simple. They are based on human nature, and human nature never changes.

The same combination of greed, fear, hope and pride that drives to ruin undisciplined U.S. investors does the same to Europeans, Australians and Chinese.

Take the example of China's Changchun High & New Technology Industries, which trades on the Shenzhen Stock Exchange. It broke out of a cup-with-handle base Jan. 14, 2013. It had the same technical characteristics as the winning bases seen regularly in places such as the IBD 50 and Big Cap 20.

But first, step back and look at the fundamentals. Changchun also had features needed in a winning trade. Its Rating is a best-possible 99, driven by a five-year earnings growth rate of 113%. (William O'Neil + Co., which serves institutional clients and is celebrating its 50th year, calculates EPS and other SmartSelect ratings for foreign-based stocks in its international database.) Earnings growth for the December 2012 quarter was a whopping 232%; sales were up 40%. The trailing four-quarter return on equity was 39%.

Changchun built a nearly 12-week cup base that showed a mild 21% decline. declined as the stock corrected. During the last week of the decline, the stock reversed, almost finishing up for the week. (1) That shows big investors coming in to support it. That support increased in coming weeks; volume rose as the stock moved higher.

A one-week developed as the stock eased 6% in quiet volume. (2) When the stock broke out with a 61.60 yuan , volume was 74% above average.

True to form, the stock rose 53% over the next four weeks.

Here's what goes on behind the scenes: As the stock declines, weak holders sell. Many sell for a loss, having purchased it at too high a price. But savvy institutions knew this was a time to buy. They supported the stock at the bottom and up the right side of the base. The handle served as a final of the remaining weak holders.

When the stock broke out, it was largely owned by strong holders and those eager to build new positions.

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