The Buy Point In A Handle
As the stock approaches new highs — building the right side of the cup pattern — the stock suddenly pulls back moderately in price. This pullback is up to 15% in depth but can be much less. According to IBD research, most handles in the most successful stocks show a drop of no more than 8% to 12% from the handle’s highest price.
Also, a good handle will form within the upper half of the base. How can you tell? Sometimes you can see it visually. Maybe the handle began forming when the stock was just a few points below the cup’s left-side high.
When it’s difficult to tell, what should you do?
Use the midpoint test. Add the highest price and lowest price within the cup, then divide by 2. Do the same with the handle.
If the handle’s midpoint is higher than the base’s midpoint, a breakout has a better chance of succeeding. The stock has already shown strong demand by climbing off its lows, plowing past prior price levels in which some shareholders had bought and immediately harbored paper losses. As a stock rebounds, these folks eagerly sell and get rid of the stock.
Use the highest level in the handle area and add 10 cents to derive the buy point.