Trading The Trend - Two More Cup And Handles

10th Jul '20 by Michael Taylor

25 comments 3838 reads

The market continues to rise, and the horrific falls in stocks seem like yesteryear. Rishi Sunak is spending money like it’s going out of fashion. There were several trading opportunities in his speech. It was widely expected that hospitality and service sectors would receive a boost and be the beneficiaries of Rishi’s seemingly unlimited spending prowess.

Yet despite this, many hospitality stocks hadn’t moved. And if they hadn’t moved, then it meant there were two possibilities:

Rishi’s spending was meaningless and had absolutely zero effect on the futures prospects of hospitality companies, or
It wasn’t priced in

Personally, I felt that the second option was more likely. This is because I didn’t see how a boost could not have an effect on the future cash flows of hospitality companies, and therefore it made no sense that the stock prices hadn’t moved. If you load up your broker charts, you will be able to see the price movements on these stocks – some reacted instantly such as J D Wetherspoon (LON:JDW) as the algos kicked in – others were slow to respond.

It’s always worth listening to potential market moving news, and looking to see if what has been expected has been priced in. It may offer a scalp trade or two.

C&C Group plc

C&C (LON:CCR) is an international drinks company which is a manufacturer as well as marketer and distributor of both a variety of alcoholic and non-alcoholic beverages. Some of its brands are well known, such as Magners, Bulmers, and Tennent’s. It picked up some of the scraps in the Conviviality fire sale back in 2018 and is now one of the biggest on-premises suppliers in the UK.

It makes sense then, that the stock price has seen some damaging in the past year. Pubs, restaurants, hotels, and other places which offer bar areas have been shut, and only now are the slowly beginning to awaken and re-open – those that are left, that is. Let’s not forget that once furlough ends, many business models will now be uneconomical and many hospitality units will have closed their doors forever.

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We can see in this instance that the 200 MA provided an excellent risk/reward trade on the short side when everything began to…

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Tonysaparito

10th Jul '20

Hello Michael...another great cup and handle article .and as suggested by you, I am reading Mark Minervini -Trade like a stock market wizard... I am no wizard but whilst the book takes a bit of reading, it's brilliant and you are a great advocate on what Mark writes..right?.

As you suggest placing a stop loss at recent lows, can you elaborate on what you regard as recent, please...Many thanks.tony

pleaty1

11th Jul '20

What do you see as a minimum time period for a cup and handle to for. For example Greatland Gold (LON:GGP) looks like a it's forming a handle on a month long cup. Is this too short a time frame. Im viewing it as a stock in a stage 2 uptrend and forming a new base, so would that make the shorter time frame acceptable as it looks to be re setting a base rather than coming out of a stage 4 cycle.

I would appreciate your thoughts

Regards Paul

Zoiberg

12th Jul '20

Hospitality businesses have high barriers to jump before becoming profitable - rates, rents, staff wages. Add in social distancing further reducing their potential to become profitable. I don't see how drawing lines on a retrospective share price chart is going to tell you if they have successfully cleared these hurdles. This is uncharted territory.

Michael Taylor

You're making the assumption that I care if these businesses successfully clear these hurdles Zoiberg - I don't.

These were intraday opportunities where if you were long a stock that hadn't moved despite it being expected to, then you could've instantly sold into the rise once it was officially announced.

They were short term intraday trades, that's all.

Hi Seagerk,

Yes, the cup and handle pattern is a powerful one.

Those are the same screens I use - 26w high is another one too. Ideally you want to be finding stocks that are moving towards the 52w high rather than being alerted when the stocks have broken through it.

Thank you aflash - yes one I missed. The beauty of the C&H pattern is that there are plenty of setups.

You can have the best pattern in the world but if it only sets up twice a year, that sucks.

Hi Paul - Greatland Gold looks to be forming a shallow bowl and a stage 2 base at the moment. It would need to fail to break the high and form the handle - but this is clearly an uptrending stock and one that may be worth taking a position in on the breakout.

Exactly Tony - I like Minervini's books - they're similar to Weinstein and O'Neill.

When putting a stop below recent lows, you ideally want to be placing your stop where this will get you out if you're wrong but not be taken out too early.

If we think if a support zone, instead of a support line, this may give you an idea.

For example, a stock where support is at 12p you may be tempted to put your stop at 12p, right? Wrong. All that will happen is that stop will get gunned down and the price will test below 12p for stop loss liquidity. This is where amateurs place their stops.

We want to be placing our stop outside of this stop loss liquidity. But still close enough to be wrong.

There is no clearly defined stop loss liquidity unfortunately, and the decision is discretionary.. The closer you place your stop to support the more likelier it is to get triggered, but the further away you place it you can also take on more risk!

However, you can adjust your position size for risk as detailed in my trading handbook from my website.

Hope this helps Tony! It can pay to load up the chart, and look at the average volatility. If you're inside the average volatility then you're likely to get hit.

Good spot Stuart - it looks like 100p (the recent high) is resistance there.

Big round numbers tend to be psychological points for traders and investors.

"I don't see how drawing lines on a retrospective share price chart is going to tell you if they have successfully cleared these hurdles."

This is also exactly right. A share price chart won't ever tell you about the underlying business. The equity and the business are related, but they are not equal. The equity price can be massively disconnected to the business.

To find out whether a business will clear the hurdles you'd need to look at the fundamentals of the business, which isn't something I do much of.

Hi Andy - I always use the daily candles and I tend to draw on support lines as I have done on the charts for Stockopedia.

Support and resistance is again a very simple concept but you can use it to your advantage. I agree, many of the ideas are simple - it's the discipline to exercise them in practice which can be hard!

13th Jul '20

Thank you Michael..brilliant as ever..

Albm7

14th Jul '20

Hi Michael, thanks for all your posts. I am long Ao World (LON:AO.) from late June based on my own TA patterns :) and I have been watching it as it appears to be making a cup. I would love your take on it.

Thanks Alb

Edit - After seeing the way it traded today, I think the cup comment I made earlier can be ignored. None the less I would appreciate any feedback/views from the community. Also what are people doing with respect to take profit percentages? We always hear about stop losses but what about taking profits?

Thanks

HumourMe

15th Jul '20

We always hear about stop losses but what about taking profits?

I found this canslim video useful. For me it broadly translated to:

For 'strong' breakouts 1/2 @ 20-25%, remainder, trail @ 11-15% off high. Sell all in the top 1/3 of any new base candidate (with intention to rebuy on a breakout).

For 'weak' breakouts trailing @ 11%, all at 20%.

'Strong/weak' determined by volume and price behaviour at and after breakout. Minervini and O'Neil mention many factors and I'm still working on comprehension with these. Selling and walking away from shares going parabolic, seems to be the difficult part.

Edit: Also as we expect a breakout to 'explode' if it doesn't within 10 days, I'll tighten initial stops/exit. As the video suggests after 8-13 weeks I'll also look to exit.

Thanks HumourMe, I will have a look at the video- I know it's very hard to mechanise but personally I need to be more disciplined in my approach to taking profits and stop losses and remembering that a trade does not become an investment!

unwise2

you are a great advocate on what Mark writes..right?.

I think it's important to point out that Mark Minervini would never trade C&C (LON:CCR) or Ab Dynamics (LON:ABDP) as they are currently setup. They would fail the first part of his screening process. Neither would O'Neal or Weinstein.

18th Jul '20

You're right unwise - he wouldn't - but I still am a firm believer in the stages of stocks and risk management being key.

In general I want to be risking 1 to make more than 1. I will do 1:1 if I think there is a 50%+ higher chance of success on the trade, because those trades in the long run will give me an edge.

Try to think about risk/reward logically. Look for resistance points. If you've got a 1 risk to 3 reward and there is strong resistance at where 2x risk would be - is having 3x risk a good reward target? Probably not!

Also, if you're risking 1 to make 50 - that's an unrealistic target and all that will happen is you're stopped out repeatedly. It's mentally tough!

20th Jul '20

Thanks Michael, I appreciate you taking the time to reply. I am trying to become more disciplined in my approach to shorter term ideas. Attempting to stick to a plan/system that allows me to be hopefully more right than wrong and also to stop sellers remorse as I see names continue to go up after I sold.

Trading the Trend - two more cup and handles

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Michael Taylor

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