Turning Patterns into Profits - Cup & Handle
Are energy stocks making a move higher? A closer look at this classic pattern.
This service is for general informational and educational purposes only and is not intended to constitute legal, tax, accounting or investment advice. These are my opinions and observations only. I am not a financial advisor.
Did you get faked out by all of the bearish “head and shoulders” talk last week?
I saw a lot of people jumping on the bear wagon early, ready for markets to tumble and pointing to a pattern that had not completely formed yet.
That’s why we are not looking at the H&S pattern this week.
Instead, we’re taking a look at a pattern that actually has formed. And it showed up in energy.
I’m sure by now you’ve heard of the cup and handle, C&H, and this week we will take a look at how to properly trade it.
Getting right into it, here’s a chart of the energy sector ETF ticker XLE.
Starting in February this year and retesting $90 again in August, the “cup” portion of the C&H pattern.
In August there was a pullback from $90 that found support near $86, followed by a bounce back move through the top of the cup to set up the potential breakout.
This is where it can be easy to jump in only to have the trade break down.
The key is to wait for the retest of the top of the cup and handle, which for XLE is right at $90.
The ideal entry point is when shares find support at $90 and start to move up towards a new recent high. Buy on the bounce, not before.
You want to wait to ensure that prior resistance has now truly become support. If support does not hold, you are simply looking at a “fake out.”
To recap, the keys to trading the Cup and Handle pattern are:
Identify both the Cup and Handle formation
Identify the “top of the cup” resistance level
Confirm that prior resistance is now support
Buy on the bounce off of support, not before
XLE had a clean break above the $90 resisstance level to close out last week. Now we are watching for step 3 to occur so we can take step 4.
There are a couple of names in the sector forming the same pattern. Energy could get really interesting over the next couple of weeks.
Full Cups of Energy
Last week I gave you the heads up, this week we get the set up.
SLB is a well-known name in the sector forming this well-known pattern.
Shares pushed back up through the $59-$60 resistance level to close out the week and now we are waiting for the retest of $59 and move higher.
I like considering adding shares below $60, using $57 as the stop loss (about 5%) with a target for taking profit starting at $63.72 and again at $65.
For an options trade, I like considering a call spread, buying the $62 strike calls and selling the $65 strike, both expiring Sept 29th. The net cost should be around $.70 per contract with a potential for 4x gains is shares push to $65 sometime in September.
The second name in the space that I’m watching closely because of the C&H pattern is APA. Here’s the chart.
The trade is similar, waiting for confirmation of support at $44 and accumulating shares in the buy zone between $44-$45.50 with the stop loss set at $42.50.
Target taking profits at $46.75 and $47.65 on the way to $50.
I also like considering call options, buying the $46 strike and selling the $50 strike with the expiration date of Sept 29th for a net cost of about $.95 per contract.
The max gain on this options trade is also just over 4x, creating a nice opportunity for big gains in the month of September.
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Have a great week of trading!
Nate