More Inverted Cup-With-Handles

Over the past several weeks, it's been a favorable environment if you trade tech stocks and cup-with-handles, inverted cup-with-handles, that is!

Last week, I noted a number of stocks breaking out to the downside from these patterns, including Agile Software (AGIL | Quote | Chart | News | PowerRating) and the Semiconductor HOLDR (SMH | Quote | Chart | News | PowerRating) on Feb. 20 and the Internet Infrastructure HOLDR (IIH | Quote | Chart | News | PowerRating) on Feb. 21. The inverted cup-with-handle, called a saucer top with platform by William Jiler, works much like the cup-with-handle.

I refer to both patterns as continuation patterns. In the case of the inverted version, you have a stock in a downtrend that attempts a rally, which fails. Shortly before or after the stock enters new low ground on the resumed decline, there's a last gasp for air, in many cases probably the result of short covering. This begins the upside-down handle. You go short as the stock undercuts the low of the handle.

On Wednesday, CheckPoint Software (CHKP | Quote | Chart | News | PowerRating) broke down from an inverted cup-with-handle. For the low of the inverted handle, which keys your pivot point, see Point a in the following chart.

The top field of all 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, of course, are risky. 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.