CLASSIC TECHNIQUES 
Cup-With-Handle And
The Computerized Approach 
by Rick Martinelli and Barry Hyman
The cup-with-handle is a chart pattern that identifies stocks preparing for uptrends. Here are the steps to convert this pattern to a set of rules for screening your stock database to identify likely candidates.
The CANSLIM approach to investing combines technical and fundamental analysis to identify some of the promising stocks in a cycle. According to the system, only those stocks meeting a set of quantifiable criteria are candidates for purchase. In addition, a stock must exhibit one of three or four different chart patterns that summarize less quantifiable aspects of the system.

Manually screening for stocks that meet these criteria is a daunting task. To be successful at this system, the investor or money manager should use either The O'Neil Database or Daily Graphs, as well as Investor's Business Daily. In addition to using these references, the investor must comb through hundreds of stocks daily to find stocks that have set up according to the system and then monitor each candidate stock for days or weeks, waiting for them to break out. Visually screening the more than 2,400 stocks in Daily Graphs each week and then monitoring them is a full-time job. And, equally important, this approach misses many stocks as they break out and misses others that do not make it into these publications.

If one could first screen for acceptable chart patterns amid the data of the more than 10,000 stocks on the market and let the computer narrow the list down to a manageable number of stocks to watch, that would be an immense time-saver. This, then, was the motivation for developing a computer algorithm to do such a screening.

CUP-WITH-HANDLE

The most common chart pattern used in the CANSLIM system is called a cup-with-handle. The pattern is so named because, when viewing a stock's price chart, it takes roughly the shape of a cup. The price rises to a peak and then falls, forming the left side of the cup. From there, the stock trades sideways for some time, then rises to form the right side of the cup. After completion of the cup, before the stock breaks out to new highs, the price often hits resistance and pulls back a little. This pullback forms what looks like a handle. The peak at the right side of the cup defines the buy or breakout point, called the pivot price.

FIGURE 1: CUP-WITH-PATTERN.Here's an idealized price-volume chart of a cup-with-handle pattern.
Rick Martinelli is president of Haiku Laboratories, which supplies customized technical and scientific software to individuals and small businesses. He may be reached via E-mail at haikulab@maui.net. Barry Hyman is portfolio manager and vice president for the Maui office of Financial and Investment Management Group, Ltd. He may be reached at bah@fimg.net. The authors wish to thank Bruce Cohen of BB&DD Inc. for his persistence over the years during which this algorithm was being developed, and his technical assistance in carrying out many of the actual screenings.
Excerpted from an article originally published in the October 1998 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 1998, Technical Analysis, Inc.
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