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How A Deceptive Breakout Unfolded.(INVESTOR EDUCATION)(INVESTOR QUIZ)
Byline: JUAN CARLOS ARANCIBIA
The cup with handle is the most successful chart pattern -- as long as it's properly formed.
Gymboree formed a cup-with-handle base for much of 2003 as it corrected 31% from a May peak. It broke out Oct. 9 on heavy volume as the stock soared (1).
But while the overall shape seemed acceptable, Gymboree's base had flaws that eventually doomed the breakout.
The handle (2), which formed from September through early October, formed in the lower half of the base. The midpoint of the handle (calculated by the sum of the 16.36 peak and the 13.80 low divided by 2) was less than the midpoint of the base.
A proper handle should form in the upper half of the pattern. Also, this handle corrected 16%, a bit excessive to be healthy.
Notice that the Relative Strength line (3) was significantly off its prior high when the stock broke out, and was trending lower while the base developed.
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