Page 156 - THE MARKET WHISPERER

154 PART 5 - Principles O f Technical Analysis

In the intraday chart for X, we can see that the stock is rising strongly at
the start of trading and meets resistance at the price of $54.49. It retreats,
drops [1] but returns again to the resistance point, and in this way forms
the cup. Now it drops to a new low [1], which shapes the handle, but this
time the low is higher than the previous low, since buyers are becoming

more aggressive. It returns again to its high within a shorter timeframe
than when forming the cup. The stock breaks through the resistance [2]
and climbs to a new high.

Interestingly, if you track back slightly into the previous trading day,

you can see that the area of resistance was formed on that day. You can

also see that if you connect the previous trading day’s formation to that
of the breakout day, you will find a more complex formation called head
and shoulder formation, which we will study later. Note that the formation
does not need to be perfect from the graphical perspective. For example,
the line of resistance does not have to pass exactly through the same

previous high points.

SMART Patterns do not have to be “pretty” or “perfect” from
MONEY the graphical perspective. A pattern is valid even with
deviations from the precise areas of support or resistance.

Inverse Cup and Handle

The inverse cup and handle is a bearish formation, the reverse of the “cup
and handle” described above. The pattern shows a stock dropping to a
low, finding support, then correcting upwards. The stock then returns to
a low, creating the shape of an inverse cup. It is then supported again at
the low point, and corrects once more upwards while forming the shape
of an inverted handle. The small handle’s shape and the amount of time
taken to form it are shorter than the time in which the cup took shape,
i.e. sellers are more aggressive. Now it returns to a low for the third time,
breaks down through support and continues lower. The breakdown point
is where we should sell short.

What have we learned prior to the breakdown? The stock dropped, and
therefore we see it is weak. The stock corrected upward but dropped again,
from which we learn that sellers are still in control. The stock rises again,
but only less than the previous high (this is the handle) and then returns to
a low in a shorter timeframe than it took to reach the previous low.