You've got to respect and understand the classics.
In books, there's "The Great Gatsby." In the realm of American food, you've got the burger and fries. And when it comes to chart reading, the most classic pattern is the .
For decades now, investors who know how to spot this pattern have been reaping profits.
The best way to become more familiar with any stock chart pattern is by looking at examples. So it's worth studying the cup-with-handle base that Cognizant Technology (CTSH) formed in 2004.
The left side of the pattern began to take shape in January 2004, as Cognizant embarked on what ended up becoming a seven-week losing streak. (1) It wasn't until June that Cognizant began etching the right side of its base.
In general, a cup-with-handle structure should be at least seven weeks long. But it could also form over the course of a year, or an even longer period of time.
The correction within the cup typically should not exceed 35%, and Cognizant fit the bill as it corrected 31%.
The part of the base represents one last of weak shareholders before the stock moves to . You generally want to see calm action and just a mild correction within the handle.
A good handle will correct only 8% to 12% or less. You might see a slide of up to 15%, but anything beyond that definitely is not ideal. In Cognizant's case, the handle — which began to develop in July — featured a correction of 14%. (2) A handle also should be at least a week or five trading days in length, although they can be longer. Cognizant took about four weeks to sketch its handle.
With any from a base, you want to see strong turnover as the stock moves out of the consolidation. Cognizant certainly delivered convincing as it broke out past a 26.74 entry in late July 2004 in big volume. (3) However, with the market in poor shape, Cognizant fell more than 8% from that . Investors had to sell and cut losses.
The market returned to a confirmed uptrend Aug. 18. The stock rallied again and cleared the 26.74 buy point for good. It also formed a tighter two-week handle in September, offering a new chance to add shares.
Some chartists might think Cognizant's pattern also resembled a double-bottom base. But the middle peak in April was a bit low.