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Understand The Pitfall Of An Up-Wedging Handle

Stock patterns are formed by institutional behavior.

Sometimes that behavior is healthy. Sometimes it is not. A is a quiet sign of problem behavior within a base.

To understand this problematic action, consider the action that sets the stage for the handle.

The left side of a cup base takes shape when large investors exit or sell large amounts of shares in a stock. The stock falls due to the increased supply of shares. The chart slips down into the cup.

The cup's right side forms as new or returning institutional buyers move aggressively into the stock. This decreases the supply of shares readily available and forces the price higher.

The handle tracks a final . Share supply is tight. Fresh institutional investors are on board and targeting higher gains.

Ideally, the stock price should drift lower in quiet trade as a last few, unsure investors bail out. When institutions step in and begin buying this dip, the stock breaks to .

But sometimes the stock price dips to begin a handle, then begins drifting upward along its lows. The daily closes may waggle back and forth. But the key attribute is daily lows getting progressively higher.

This flags the pending as risky. Perhaps a few breakouts from wedging handles succeed. Most fail.

Handles in which prices simply wander sideways are slightly less risky. But not as strong as a downward drift in quiet trade.

A wedging handle often accompanies other warnings. Is the in the handle heavy? Is the handle in the lower half of the base's cup? Is the cup V-shaped

Each of these factors signals flaws in the institutional behavior that sets the stage for a breakout. A single flaw may not be enough to warn investors off a stock with compensating strengths.

But an accumulation of two or more is a clear message for savvy investors to step back from a breakout that is showing signs of breakdown.

In late August to early September 2011, gold and copper miner Barrick Gold (ABX) finished a second handle on a four-month cup base. The base had problems. But gold had ended August up 33% for the year and some analysts were calling for $2,000 an ounce.

Barrick's first handle had formed too low in the base 1 The breakout quickly reversed and the stock began a second handle above the base's midpoint.

This handle wedged up 2 The Sept. 2 breakout past 52.88 occurred in tepid volume. Never mind gold prices; the stock was not saying, "Buy me.

The stock rose 6%, then quickly backed off 23% in heavy trade. The stock has continued to retreat, and is nearly 39% below its September 2011 high of 55.95.