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Cup With Handle Is Familiar, But Understand Key Nuances

Cup-with-handle bases are common. They launch many of the most successful stock runs. But practiced investors know not to confuse "familiar" with "simple.

The cup-with-handle pattern can be cagey, challenging investors with difficult choices. This is why it's worth studying and understanding the nuances found in recent examples to see what is working and what is not.

Regeneron Pharmaceuticals (REGN) launched out of a cup in December 2009. The base was V-shaped, a flaw (please see a historical chart on MarketSmith.com). In addition, IBD-style investors would have likely sat out the because the drugmaker wasn't set to become profitable until the first quarter of 2012.

It wasn't until after the company's second profitable quarter, reported in July last year, that the stock staged its real breakout — also from a .

The key prerequisite was in place: a steep climb of more than 30% before the pattern started to form in April. Some investors may have been reading the pattern as a double-bottom base with a 137.92 . But the first pullback appears too shallow, and the stock didn't rebound quickly after hitting a low of 107.31 in late June. (1)

The stock shot up near 137 in heavy trade on July 25, the day the company reported earnings. It gained 5% in strong trade the following day, but still hung below the pivot.

When shares finally did clear the mark, it was in very weak trade — clearly not a breakout. The stock traded sideways and closed tight for four weeks. In the process, it formed a with a 142.06 buy point.

Rumors of a takeover by French drugmaker Sanofi (SNY) sent shares up 3% on Aug. 23. The strong move broke shares above the buy point, christening an advance that has tallied a 119% gain through last week.

When Actavis (ACT) finished a cup-with-handle base in September 2011, investors may have been leery. The stock had just cleared a second-stage cup with handle, but only briefly, before diving into the much deeper base. The correction undercut the prior base and reset the stock's base count. That was a positive. But the cup's right side was not picture perfect.

First, it erupted practically straight up from the bottom in an 11% gain, to retake both 10- and 40-week-lines support in the week ended March 23, 2012. Then it began to form a handle with an upward drift, a negative. This weighed two flaws against the pattern.

But by early April, it had a mild , setting up a 67.71 buy point. On April 20, it cleared that buy point on a barely sufficient 38% increase in volume, then wavered for a few sessions.

On April 26, a 7% stab higher in huge volume sealed the breakout. It also set in motion a run-up that had doubled the stock's price through Friday's close.