Seasoned CAN SLIM investors know the proper buy point in a cup base is when the stock clears the left-side high or the top of a handle by 10 cents.
Sometimes, it's worth seeking an earlier alternative entry. One advanced buying strategy involves drawing a downward-slanting trend line on the stock's chart. It can help you find a buy point that's several points below the usual entry as well as below the handle buy point.
To determine where the alternative entry lies, draw a trend line across the highs of a base, or in some cases across the handle's highs. The trend line should connect at least three price points.
Your ideal buy point would be when the stock crosses above the trend line, which marks an area of resistance. Look for volume to kick in at least 40% above average. Investors.com provides volume percent change data for stocks during the trading day.
You should move as soon as the stock clears the buy point. If you wait to see if it closes above the line, it could already be extended. As always, cut losses at 8% or less.
To find the lower potential entry in a cup-with-handle pattern, draw a trend line that starts at the high of the base's left side and connect that to the top of the handle. This should provide a lower buy point.
It's best to draw trend lines on a daily chart unless the base has been building for multiple months. If that's the case, you can use a weekly chart.
On April 6, 2004, Potash Corp. of Saskatchewan (POT) began building the left side of a cup base. Two months later it started to form a handle, which drifted slightly downward in light volume. That's ideal action in a sound cup with handle.
An aggressive investor looking to buy shares before the stock reached 10 cents above the high of the handle — 89.29 in this case (1) — could have drawn a trend line connecting the highest points along the handle.
That would have produced an alternative entry near 86.70 (2) , more than 2 points below the standard buy point. As it turns out, Potash cleared both buy points during an 8% surge on June 17 in its heaviest volume since October 2003. Volume shot 560% above its 50-day average.
An experienced investor could have gotten a jump-start by buying shares at the open, instead of later in the session. By the close that day, the 6% gain from the trend-line buy point was double the 3% from the standard entry. Potash gained 94% in six months.