Technical Analysis: A Cup And Handle You Don’t Want To Miss

| March 7, 2012 | 0 Comments

An amazing opportunity to make money in small cap stocks is developing right now.

Here’s the thing…

One of my favorite bullish continuation patterns is forming on the chart of the Russell 2000 small cap index.  It’s called the cup and handle. 

The pattern’s funny name comes from it looking a bit like a tea cup.

But believe me, the pattern has a great track record of occurring just before a stock or index makes a big move higher.  Just flip through a few charts of some of the best performing stocks of all-time and you’ll see this pattern over and over again.

In fact, I found another cup and handle chart pattern in the Russell 2000 in 2010.

Take a look at this chart of the iShares Russell 2000 ETF (IWM).

iShares Russell 2000 ETF Chart

You can see the Russell 2000 was in a clear uptrend (green line) in early 2010.  IWM was up more than 117% off the March 2009 lows.

Then it went through a multi-month consolidation.  This “U” shaped pattern formed the cup (lower blue line) of our pattern.  The depth of the “U” is about $14 ($74, the blue line, minus low of the bowl, $60).

The handle was formed as IWM went through another four week consolidation (red lines) near the previous high.  Also note how the volume dried up when the handle was formed.  Notice how the volume bars become smaller (green arrows).

Then IWM broke out above resistance in late November.  And the small cap ETF surged 16% over the next four months.  That’s a big move in a short period of time for an ETF.

I don’t know about you, but I think it’s a good idea to have my money invested before the Russell 2000 surges 16% over a few months’ time.

And that’s exactly what I’m expecting it to do again.

Just look at this recent chart of IWM…

iShares Russell 2000 ETF Chart

As you can see, it’s in an uptrend (green line), it’s gone through a multi-month consolidation (blue line) to form a cup, and now it’s forming a handle as it consolidates again (red lines).  And in addition to that, volume has dried up (green arrows).

No doubt about it, this chart has all the makings of a bullish cup and handle continuation pattern.

Here’s what you need to do now…

Remember, this cup and handle chart pattern isn’t complete until IWM breaks above the downtrend line.  That means IWM needs to move above $80 and stay there.  And preferably, the move should be done on a big increase in volume.

However, once IWM breaks out, it should continue running another 20%.  That would put IWM north of $100.

Yes, you read that right…

We’re on the verge of a major rally in small cap stocks.

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Category: Technical Analysis

About the Author ()

Corey Williams is the editor of Sector ETF Trader, an investment advisory service focused on profiting from ETFs and the economic cycle. Under Corey’s leadership, the Sector ETF Trader has become one of the most popular and successful ETF advisories around. In addition to his groundbreaking service, Corey is the lead contributor to ETF Trading Research, where he shares his insights about ETFs and financial markets on a daily basis. He’s also a regular contributor to the Dynamic Wealth Report and the editor of one the hottest option trading services around – Elite Option Trader.

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