A Zak Mir Special – Cups, handles, the devils spawn and saucer and rounded bottoms!

Having likened the chart pattern on the Nikkei over the past year and a half to a “Cup & Handle” formation, I was asked this weekend by our dear Spreadbet Magazine founder Richard Jennings to offer a little more on the subject.

The definition of this much talked about charting feature is that of a U shaped or rounded bottomed pattern (the cup) which has a partial pullback at resistance (the handle) before an eventual sharp and sustained breakout.

An alternative description could actually be that this ultra bullish formation is actually a type of failed initial double top – more of which will become evident in the examples below. But just to get us started, the most classic C&H I have seen in the recent past was at Hochschild Mining (HOC). I hope the artwork is appreciated!

Perhaps even more of a challenge than describing the nature of the pattern is actually to come up with, as asked, three C&H contenders which are about to break out. This is an issue for a number of reasons. The first is that the C&H is a relatively rare setup, and does not exactly appear to order.  Even worse, the formation, even at the best of times, is a difficult one to spot, and is subject to numerous variations. The trick, if there is one, is to be able to get to know the genre well enough to allow it the wiggle room it needs both in terms of the exact trigger and timing of any resultant trade.

It is thus logical at this point to wade into the example of C&H which has done the bulls proud in the recent past. In the case of Playtec (PTEC) the action which started a magnificent rally came over the May to September period in 2012. Here we see the classic rounded bottom to the formation, as well as the one third retracement of the cup height back to the then position of the 50 day moving average at 367p. But it was the October 19^th end of day close at 403p and above the cup top which signalled the big rally which is ongoing was about to begin. This broke the top of the “Cup” at 400p and was the ideal entry point with the top loss initially then positioned at the 10 day moving average at 387p. 

The message as far as money management is concerned with C&H formations is that even though we would be expecting upside of say, 20% and more, risking more than 5% is still not wise. This is given the way that you might have to have a second bite of the cherry if kicked out of position the first time. If you lose to much the first time, the temptation may be to stand aside, and hence miss out.

Playtec is of course an example from the past, albeit one that is still accelerating to the upside at a rate of knots. This is also the case as far as Johnson Press (JPR) is concerned, and where the breakout came in January from what I would describe as a “shallow” C&H – one that has a “saucer” bottom, rather than a rounded one. This is important as I think it leads to even greater rallies than the traditional C&H. In fact, given that I think this is a new discovery, I would be tempted to call it the Zak Mir C&H!

A good example of a supercharged C&H formation which appears to be ready to explode is at Soco International (SIA). Here we have a reversal formation in place since the start of the autumn, with the initial knockback from the 450p neckline. An end of day close above this level would be the entry point with the favoured stop loss being an end of day close back below the 20 day moving average currently at 425p currently.  Ideally, by the time of the break the 20 day average will imply a stop loss of less than 5%. The measured move target – beinng the depth of the cup – is 80p and which when added to the neckline level gives a 530p destination.

Moving on to the next C&H example and we have Anglo Pacific (APF). Here we have the “handle” resting on the 200 day moving average at 200p. The implication currently is that a break of the recent February resistance at 214p would be enough to trigger a 30p plus breakout, equal to the depth of the “cup”.  The trailing stop loss at this stage would not appear to be any further than the 10 day moving average now at 197p, especially given that this is also currently below the 200 day line.

Finally, there is a sense of irony in terms of the stock which is offering up one of the strongest setups in charting at the moment, the “devils spawn” that one almost dare not mention its name. Yes, Kazakhmys (KAZ)! It would appear that within just a matter of days we have been treated to a mind blowing turnaround here, via an unfilled gap to the upside through the 50 day moving average now at 197p. The C&H set up we have now is that the shares just need to close above the top of the “cup” at 239p to deliver an implied cup depth target of as high as 310p over the next 4-6 weeks.

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