Learning Markets - Investing education and trading ideas

by marshall on July 27, 2012

This Trade Was Closed September 24, 2012

I sold too early based partly on this blog but I am very happy to report my son did not and got the recent big gains. I’m bullish on this one – recently bought an option call for Jan 2014 exp. at $5. Unless WWIII breaks out this stock will be tickling $20 by then. This company will see $70 again someday. It’s incredibly well managed.

Original Trade Post:

HOV has cup with handle chart. Homebuilder news optimistic. This is my first trade looking at a chart. What do you think?

Trade Details:

The Ticker: hov
The Trade: Buy at $2.48
Target Price: $4

Trade Opened: July 27, 2012
Trade Closed: September 24, 2012

Chart courtesy Finviz. Click to open in larger window.

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Alex_P

This pattern is everything but “Cup with handle”. It doesn’t fit many of criteria from O’Neil definition. Its way too lose and cup is extremely deep.
John Jagerson

John (sorry I called you Marshall before) this is still a very interesting analysis. I am glad you jumped into the fray. We are a small group now but hopefully your skills and success will grow with us.
john marshall

As far as the price target goes – I just arbitrarily chose one because the field required it. I’m very new to this and have read only Bill O’Neill’s stuff thus far, subscribed to IBD and their website and I’m having fun basicially. I am certainly wary of any one approach but the IBD stuff makes good sense. So I dumped HOV and rearranged things. Now I’m long on TFM, ELLI, MLNX and ASPS based almost exclusively on the IBD website ratings. Please throw me a line if you have any advice regarding aforementioned stocks. Many thanks – John
John Jagerson

Marshall – Although I endorse Pete’s idea about reading Bill O’Neil’s book (it is quite good) I disagree with him a little about how strict the pattern really needs to be. Price patterns in general are telling us a story about investor sentiment and money flow. I think that if the story fits a pattern that is a little less than ideal its still OK. Bulkowski did some very interesting work comparing a very strict definition of C&H with a looser one and found that neither was that great. A few notable findings however will probably make sense. 1. strength of the bullish trend prior to the CH was important. 2. Flat handles performed better than down-trending handles (like the one on HOV) 3. Buying the breakout (above the lip) was a better performer. 4. Selling a failed pattern actually did very well.

Now all that is a statistical study from a limited dataset, which we all know is pretty tough in the market. However, I think that it could help generate a few ideas about how to use the analysis and when a trade should be entered – or not.

My bottom line is that I agree with Pete that this is probably not the best bullish pattern I have ever seen. I would wait for a very solid bullish breakout before taking a risk. On the other hand… I think a failure of the CH is likely and could be a very attractive short.
Pete P

No, not close to being a legit cup/handle if you believe the rules for the pattern that were established by the “inventor” or “discoverer” of the pattern, the man who coined the phrase. William O’Neil of IBD fame. HOV shows too many major violations of the pattern, too many to mention here but…..okay, for starters the depth of the pattern is excessive percentage wise (highs of left side of cup, 3.31, to low, 1.52. The handle is wide and loose, sloppy so to speak, and its depth is also excessive. Yes, the handle has its own specific rules. I suggest if you really want to learn the pattern that you read O’Neil’s classics in which he goes in-depth on what constitutes a proper cup with handle pattern.
http://www.learningmarkets.com/ Dan Olson

Marshall, it looks interesting. Seems to me like the handle isn’t fully formed yet and we’d need to see a breakout above 3 to confirm a continuation pattern. But that’s just my take.

I noticed an analyst downgraded them to sell in Feb, which is unusual (for an analyst, that is). The stock took a dive shortly thereafter. This stock has been pretty bouncy compared with other homebuilders like TOL and DHI. Why are you thinking $4 for a target? Or was that just an arbitrary pick.

HOV…cup with handle????

HOV…cup with handle????

Original Trade Post:

Trade Details: