How much of a move can be expected on a breakout of a cup with handle pattern? (July 10, 2000)

  If a stock breaks out of a well-formed pattern on 1.5 times the 50 day average volume or better, it has a good chance of continuing the move up. How much each stock gains is dependent upon that stock. Stocks breaking out of a cup with handle usually race ahead, and then succumb to some profit taking as short term investors get out and analysts say the stock is overvalued. That is why we usually don't panic if a great stock breaks out and we don't catch it on the first move. We want to catch that move, but stocks often test the breakout to some extent before it moves back up. PSEM broke out at 52.75 and rose to 81.88 on its intraday high before it gave it all back and started back up the past two sessions. That is a 55% gain on its high.

We are still young in this rally. Many stocks are just breaking out and starting up. We could see large gains ahead as long as the market remains healthy. JNPR is an example. The stock broke out of its first handle pattern on 6-19 when it crossed 124. It ran to 135 and then pulled back to its 10 day moving average at 122. It formed another handle and then broke out over 135 on 6-28. Today it closed at 147 after hitting an intraday high of 154. The stock is bouncing up its 10 day moving average, a strong stock tendency after breaking out of a solid pattern. It is now up 20% and is looking for more. It too is early in its move, and has yet to break to a new high. That move is imminent and we are looking for the move on heavy volume.

In summary, there is no real limit to how far a stock can run on a breakout from a cup with handle. If a stock moves 20% in the first few weeks out of such a pattern, it is worth holding the stock and letting it run for you. Stocks that move that well on a breakout are usually the big winners in a rally. If you are playing options, you may want to enter and exit a position as a stock breaks out and then starts to succumb to profit taking-you can wait with a stock, but an option is a wasting asset (see the weekend discussion). When a stock breaks out of a strong pattern, we tend to let it run. IMNX was down today, but the breakout was strong and today's selling was on light, below average volume. We are content to let the stock start another strong move back up with our stock positions, but we will be more cautious with our options (though we bough September options and thus have more time).


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