These four stocks have formed technical cup-and-handle patterns on their daily charts and are testing their rim line resistance levels. Here's why they could be compelling trades.
A successful cup-and-handle breakout projects a pattern price objective measured by adding the height of the cup to the rim line.
In each of these cases, the breakout would target a large-percentage gain.
A.O. Smith (AOS) manufactures commercial and home water heaters and boilers.
The stock price had been hot going into early October but cooled quickly later in the month, dropping down to just above a 38% Fibonacci retracement of its 2016 range. It was able to bounce sharply this month and return to what had previously been key support in the $48.50 area. This level turned out to be the rim line of a cup-and-handle formation, and it was taken out in Friday's holiday shortened session.
Moving average convergence/divergence has made a bullish crossover and is tracking above its center line, reflecting the improved price momentum. The vortex indicator, which is designed to identify early shifts in trend direction, made a bullish green-over-red line crossover. Chaikin money flow has moved into positive territory, reflecting renewed buying interest in the stock.
It is a long candidate at its current level using a trailing percentage stop.
The chart of 3-D printing and services company 3D Systems (DDD) shows similar price action over the last two months, forming its cup-and-handle pattern with the rim line at the $14.75 level. That resistance was broken last week, but the 50-day moving average stopped any further advance.
The stock was down 1.5% in Friday's session, holding just above the rim line. The relative strength index has moved above its 21-period average and its center line, reflecting the positive price momentum since the November low. The vortex indicator has made a positive crossover. Money flow has been improving since that time, and the accumulation/distribution line has crossed over its signal average.
The stock is a buy after another upper candle close above the rim line, using a trailing percentage stop.
Over the last two months, Kite Pharma (KITE) shares established a cup-and-handle formation with rim line resistance in the $52 area. It broke above pattern resistance on Monday last week, only to immediately pull back under it, after failing to hold above the September lows in the $54 area.
The stock finished the Friday session just below the intersection of the 50- and 200-day moving averages and inside the confines of the pattern handle. Moving average convergence/divergence is above its center line, but the histogram of the oscillator has been making lower bar highs. The vortex indicator suggests the trend is still higher.
One strong technical positive is the reading on the Chaikin money flow index, which is very strong and reflects accumulation over the last several weeks.
The stock is a long candidate after an upper candle close above the rim line using a trailing percentage stop.
Paychex (PAYX) provides payroll and benefits services to small- and medium-sized businesses.
A large bullish engulfing candle formed on the chart this month, encompassing the prior week's trading range and powering a rapid retrace from the bottom of the stock's cup-and-handle pattern to the $57 rim line.
It broke out of the pattern last week, returning to the $58 level, which had supported the stock price in August and September of 2016. The momentum and trend indications are all positive, and Chaikin money flow moved into positive territory this week. A small doji candle formed in Friday's session, which could be a warning that the stock wants to retest the $57 level before it continues higher.
A successful retest would be a good entry point, using a trailing percentage stop.