When you look at a stock chart just by itself, it can be baffling and may appear to hold few clues for investors. Exactly when is it a good time to buy a stock? Netflix stock showed just how well it can work.
That is where chart tools and base patterns come in handy. Among several historically reliable patterns, the cup with handle is one of the most successful patterns. This simple pattern resembles a tea cup when viewed from the side — with a well-formed U-shape and a dip near the top.
A well-formed cup base shows buyers gradually taking control of the stock as it rides up the right side of the base.
Some buyers may get shaken out as the stock approaches new highs. That can actually be good news. That final shakeout is the handle portion of the base.
Cup With Handle Characteristics
There are certain characteristics that define the cup-with-handle base. One is that it should last at least seven weeks. Ideally, the stock is already in an uptrend and has gained at least 30% before a correction gives the starting point of the new base.
If the stock has rallied after a prior breakout, a 20% gain before the new base forms also counts.
The handle should be at least five days long, though it could be much longer. Also, it should form in the upper half of the cup base and above the 50-day moving average.
It is easy to calculate the upper half. Merely divide the highest and lowest prices of the base by two. Do the same calculation for the handle portion. The midpoint of the handle should be higher than the midpoint of the whole base.
Sometimes the handle can be long and deep enough to become a base by itself. That is still good action.
The depth of the cup can be wide ranging, from just 12% to about 33%. The handle should be 8% to 12% deep.
Broader market conditions also affect the pattern. In a severe bear market, the handle can be even 20% or 30% deep, and the base more than 50% deep. (Check the The Big Picture for market direction.)
The handle should show light volume. That indicates that buyers remained amid the shakeout.
Netflix Stock Rallied 39% From Cup With Handle
The buy point is equal to the highest price in the handle area. Volume should be at least 40% above average when shares top the buy point.
Shares of Netflix formed a cup with handle in early 2023, according to IBD MarketSurge.
The cup base started on Feb. 3, 2023 and was 25% deep (1). The handle's depth was 10% and lasted six weeks amid light trading (2).
Shares broke out past the 349.80 buy point in strong volume on May 18 (3). Netflix stock rallied 39% after the breakout to a high of 485 on July 19.
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