Cups (With Handles) Runneth Over

Now is the time when your conscientious daily chart work will pay off. When the market shifts from bear to bull, the most convincing evidence comes in the form of individual stocks.

Cup-with-handle breakouts proliferate at market bottoms and nascent rallies while becoming scarcer as rallies age. The pattern was easy to spot among the leading retailers and financials Wednesday, two sectors which surged on the Federal Reserve's big, inter-meeting interest rate cut. 

American Eagle Outfitters (AEOS | Quote | Chart | News | PowerRating) surged 6 1/16 to 47 11/16 on volume of nearly 2.9 million shares, more than double its usual trade. After the close, the youth-oriented apparel retailer reported December same-store sales rose 11.8% over December 1999. Total sales for the month expanded 45.1% to a record $231.8 million.

The stock cleared a five-week cup-with-handle base. A tad short. But if you take a longer view, this could qualify as a longer ascending base, or base on top of a base, formed by two cup-with-handles. As with any healthy breakout, the stock's relative strength line moved into new high ground along with the price breakout and underlying volume expansion.

Also note the process of accumulation within the overall pattern. I count 10 accumulation days vs. five distribution days on sessions marked by above-average trading volume. That represents institutions building positions in the stock, a bullish internal. I spell out my guidelines for recognizing valid accumulations and distributions in my lesson Using Volume: The Key to Price & Liquidity.

Here's a longer view of the stock. See the well-established prior uptrend. Cup-with-handle and ascending bases are continuation patterns, not reversal patterns. So you want to see them form in the context of a strong uptrend.

In the financial arena, investment bank Lehman Brothers (LEH | Quote | Chart | News | PowerRating) shot up 11 3/16 to 76 1/8, turning in a cup-with-handle breakout on 5.2 million shares, double average volume. 

Here's a longer view. Again, note the relative strength line confirmation.

Another good sign for the momentum market: A multiplication of bullish engulfing patterns on fast trade among growth and technology companies companies. Examples include Tollgrade Communications (TLGD | Quote | Chart | News | PowerRating), Newport (NEWP | Quote | Chart | News | PowerRating), Keithly Instruments (KEI | Quote | Chart | News | PowerRating) and Immunex (IMNX | Quote | Chart | News | PowerRating).

I would not go these stocks at this stage. They're under too much overhead supply. They need time to work through those weak holders and develop strong uptrends. But it's heartening to see these intraday upside reversals with real money pouring in. I believe a sustainable rally, one with enough octane to reward intermediate-term momentum players, needs an end to the Nasdaq bear market, and that obviously cannot happen until tech turns around.

The top field of all stock charts in this commentary uses a logarithmic price scale and displays a 50-day price average in red. In the second field, a blue relative strength line represents the displayed security's price performance relative to the S&P 500. The third field displays vertical daily volume bars in black with a 50-day moving average in blue for volume.

All stocks are speculative. In any new trade, reduce your risk by limiting your position size and setting a protective price stop where you will sell your new buy or cover your short in case the market turns against you. For an introduction to combining price stops with position sizing, see my lesson, Risky Business. For further treatment of these and related topics, check out the Money Management area of TradingMarkets' Stocks Education section.