In the previous chapter we learned (among other subjects) about the saucer pattern, in which prices consolidate beneath a resistance level and gradually ramp up to burst above that resistance level. The saucer pattern can be very powerful if it is at the bottom of a chart after a long descent and if it is accompanied by a substantial volume increase during the breakout.
A relative of the saucer pattern is one identified by newspaper publisher and author William O'Neil as the "cup with handle" pattern (which he introduced in his 1988 book, How to Make Money in Stocks). This pattern has a saucer shape, but instead of breaking above resistance, it pauses and hammers out a smaller, shallower saucer referred to as the handle. When the pattern is complete, it roughly resembles an edge-on view of a teacup. It is formed in this manner:
Sellers are in control of the market as the stock price decreases (this is the left side of the cup).
An equilibrium is created between buyers and sellers as the price stabilizes (this is the base of the cup).
A rise in price takes place as buying interest and strength increase (this is the right side of the cup).
A hesitation on the part of the market occurs as the price again moves away from resistance, but not nearly as deep as before.
A renewed interest in the stock comes about, completed by a breakout above resistance (this completes the handle and the entire pattern).
Figure 11.1. This chart of Red Hat shows an almost perfect cup ...