Some Handles Feature Shakeouts.(A)(INVESTOR'S CORNER)

Byline: JONAH KERI

As we learn every year on Halloween, everyone likes a little scare sometimes. Investors should likewise embrace a little spookiness, especially if it leads to smiles later.

So what ghoulish event in a stock that scares investors can later prove good for them? Shakeouts, namely, a quick price drop in a stock late in its base, followed by a quick reversal and a breakout.

Scarier than cobwebs and eye of newt, shakeouts often occur as a stock forms the handle at the end of a cup-with-handle base and other bullish chart patterns. A stock forms a base, or a temporary price correction, after a run-up. It needs this to wring out the froth that may have accumulated during its prior run.

After building the right side of its base and approaching its high, the stock etches a downward-sloping handle. Normally, the handle features a quiet drift downward as volume stays light.

A shakeout can throw a tremor into the mix. It occurs when the stock suddenly lurches downward for a day, even a week. Volume might shoot up as leftover weak holders rush to the exits.

When such a panic occurs, check to see how the stock acts at the end of that day, or week. Did the stock bounce back, closing at the upper end of ...