Sunday, April 01, 2007

Cups and Handles - Redux

It's been a while since I talked about this, but I wanted to do a quick review of cups and handles. As you'll remember, a "cup and handle" is a chart pattern that technicians use to occasionally attempt to predict future price movement in a security. Here is a link to my previous post on cups and handles.

Let's look at some simple charts of U.TO or Uranium Participation Group on the Toronto exchange. U.TO trades roughly in line with the price of U3O8 (with a speculative premium). U.TO is a company that stockpiles yellow cake supplies.

The first chart off to the rght is the period mid-2004 to september 2006 on U.TO. If you look closely you can actually see two separate cup and handle-esque pattern formed during this period.

I do a lame attempt at tryin to highlight these pattern in red ink in the second chart. the two green vertical lines are merely indicating the period where a bullish run-up in price took place off the back end of the first handle.

Remember, that cups and handles are most indicative of future trending behavior after a longer term trend is already in place (duh). In other words, it more indicative of a longer term trend taking a "rest" or getting ready to continue with a longer term trend.

In these cases, the reason we care, is that as the cup and handle breaks out it can be rather explosive in price. In chart three I highlight the second cup and handle. This cup and handle isn't as well formed as the first as the price action is quite choppy.

In the fourth chart I "zoom in" on this second cup and handle. While choppy, given the fact that it took place after a run-up in a longer term trend, i still viewed it as quite positive, and made several comments on this blog and to personal friends that Uranium was looking quite bullish.

As you can see in the fifth and final chart, which shows the second cup and handle and the price action from the subsequent breakout, the price action was pretty magnificent.

While most who trade on the fundamentals would attribute this to the cigar lake accident which put into question a large futre prospective uranium supply. it's also interesting to note that the price action in U.TO and the Junior miners set up *ahead* of this accident.

Once the news broke publically, the true breakout happened. But at the time, the prices were already nosing up against all time highs on the backside of a cup and handle formation in the midst of what looked like a signficant long-term bullish trend.

If you want more info on cups and handles, and why i think they might actually be some insight on market psychology -- especially when they are evaluated in conjunction with volume trends which i didn't bother doing here, see my earlier post.

ciao for now,


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