7-Bells Tour

FAQ

What Are The 7 Bells?

7-Bells displays the results of 7 proprietary scans of a market database consisting of over 5,000 stocks. Each scan locates individual stocks with chart pattern characteristics that favor the development of a specific trading opportunity.

How Do I Use The Information?

The tour through the 7-Bells presents a wealth of ideas on specific trading strategies that will capitalize on the chart pattern, if and when the trading opportunity appears. Familiarize yourself with some or all of the strategies being discussed. Then perform your own analysis utilizing the linked charts, or your own software. Some chart patterns may take a number of bars to develop into a profitable trading opportunity. Put your screened candidates into a hot list, watch them closely and wait for the trade to set up. If you decide to execute, always cut your losses with the exercise of disciplined risk management (loss limitation) techniques.

Are The 7 Bells Stock Picks?

No, they are stock scans. Lazy traders who just take these results and buy (or sell) stocks without doing their homework will lose money. Bell candidates have chart pattern characteristics associated with specific predictable and profitable outcomes. But there is no guarantee any stock candidate will act according to the expectations of the opportunity being described. And when it does, there is no guarantee your trading skills and interface will get you the right entry and exit fills to make a profit.

How Often Are They Updated?

7-Bells results are posted Sunday through Thursday, between 5pm and 8pm ET. This output can be utilized for the following market day.

What's Being Displayed For Each Ticker?

Each listing displays closing price for that day, net price change and associated cumulative volume.

How Big Is The Stock Universe?

The market database consists of over 5,000 stocks. These represent the top 60% NYSE, Amex and NASDAQ volume listings as computed with a 90 day moving average of volume.

What About Extended Trading Hours?

Bells scans are based on a snapshot of the market at or near the traditional closing time of 4pm Eastern time USA.

Does It Include Low-Priced Or Thin Volume Issues?

No. Only stocks closing over $5.00 and having a 50 day moving average of volume in excess of 100,000 shares are included.

Why Do Some Bells Have Less Stocks Than The Others?

Each Bell lists up to 3 candidates for each market day. There is no guarantee 3 appropriate candidates will develop on a daily basis. For example, during sharp corrections, results requiring new highs may dry up completely.

Dip Trip

Corrective movement following a strong rally triggers the Dip Trip. This trade setup recognizes the pullback as an opportunity to buy at lower prices, in anticipation of a swing back toward the highs. The dynamics require a bull trend, a strong breakout, and high volume in order to work as expected.

Greed-based bull psychology controls the physics of rally movement. This reduces the odds that the pullback will follow through and trigger a new downtrend. The best dip trades limit candidates to early pullbacks after a breakout, in order to avoid overbought conditions that increase the odds for a reversal.

The Dip Trip carries a high win ratio when entered properly, and in favorable conditions. The disciplined trader can turn a profit in 60% to 70% of trade executions. The key lies in a proper exit strategy. The trade dynamics may depend on an Elliott "B wave" correction. This predicts the bounce will eventually fail and lead to a lower low. Therefore, it's best to take profits as soon as momentum from the bounce starts to dry up.

Stocks often pull back to support after a strong breakout. This shakes out the breakout buyers and offer a second chance to get on board. Find the best entry price by looking for convergence of support through trendlines, moving averages and prior highs.

Don't confuse the Dip Trip with the investor's habit of "buying the dip". Although similar, a precise mathematical scheme drives these trade entries. And they always focus on highly condensed price and time criteria.

The most effective trade entries utilize Fibonacci numbers to locate appropriate execution prices. Robert Fischer studied the crowd dynamics behind this force in his book Fibonacci Applications and Strategies for Traders. This volume provides many useful examples of Fibonacci-based trades.

Locate entry points by placing a Fibonacci grid across the highs and lows of price waves. The 2nd bottom of a double bottom pattern often provides an excellent starting point for the relative lows. Place more grids within smaller time frames for detailed price analysis that encloses the ascending lows and extreme highs.

Use cross-verification to locate expected reversal levels. Complete your analysis by examining moving averages, prior gaps, and trendlines. Look for support-resistance to synchronize with the Fibonacci grid.

Focus On Day Trading

Fibonacci retracement works well on intraday charts as long as the stocks print high volume. Note how EBAY corrects 50% of its morning selloff before rolling over. The trader may need to examine prior sessions to locate highs/lows before calculating expected reversals. In addition to other trends, prices can swing off common retracements of the first hour's range. These levels become support or resistance after the price moves out of their influence.

A series of Dip Trades may occur in sequence in a strongly trending market. These occur at key retracement levels and require remeasurement after every price surge. The technician must conduct a fresh analysis of risk:reward potential as each move completes. Of course, every trade must stand on its own merits. Clearly, some trends are prettier and more profitable than others.

Dip Trips appear in all time frames, and are highly effective scalping day trades. 2 to 5 day, 5-minute bar charts provide an effective framework to locate profitable dips. During these short-term trades, tape reading can offer better feedback than technical analysis. But profitability increases when entries synchronize with intraday moving averages. Dynamic intraday trends typically find support at a 5 or 6 period, 5-minute bar moving averages.

The 38-62

Combining two price waves of the trend leading into a high can elicit a very profitable setup. Look to buy where the 38% retracement of the longer trend lines up with the 62% retracement of the shorter one. Keep in mind strong trends should not retrace more than 62% to 78% of the pullback. Breaks through these support levels lead to first failure patterns.

An excellent Dip setup buys the first test of a continuation gap. These gaps rarely get filled on the first try. When it does occur, it usually prints an island break that telegraphs well in advance of the failure. Look for these gaps at 50% retracement levels of dynamic trends.

Many continuation gaps hide behind temporary reversal closures. These represent continuation gaps in one time frame but exhaustion gaps in the next shorter one. The skilled trader can pick out these hidden levels using candlesticks. Two candle patterns that reveal these gaps are Dark Cloud Cover and Counterattack sequences. Both eventually resolve in the direction of the original gap.

Another Dip trade buys the first test of the prior consolidation pattern. Look for a reversal to climax at the horizontal top of an ascending triangle, or the apex of a symmetrical triangle. Each pattern has unique architecture, with correcting price reaching an equilibrium point somewhere in the structure, and quickly emerging.

Trend relativity errors constitute a major risk with Dip trades. By misinterpreting relative time frames, i.e. mixing minor and major trends, profits evaporate as a larger correction takes hold. Fortunately, even poor Dip entries may provide several opportunities for a safe exit. Risk adverse traders should wait for deep retracement numbers before entry. They will miss a few good trades, but the odds shift dramatically in their favor at these extreme levels.

Time Analysis

Time absorbs price. Each new countertrend wave requires a fresh analysis of the risk:reward potential AND time proportionality to the direct rally. In other words, the time it takes for a trending stock to reach the bottom of a correction affects its ability to generate a profitable bounce, within the time frame of the trader.

Time absorbs volatility. Loss of volatility is the enemy of the active trader. Flat markets steal profits as effectively as losing positions. Measure the impact of time on Dip Trip profitability by counting the number of bars within the last rally wave. Compare that number to the bar count after the dip begins. Corrective moves should complete in less time than the prior rally in all cases.

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Power Spike

Uncover great swing trades using a simple market scan that searches for high-volume events. These "power spikes" often take place at the cusp of major breakouts or breakdowns, but they can appear anywhere on the price chart. Let's see how this scan can fill your watch list with the hottest and coldest stocks in the market.

Routine order flow masks the true nature of accumulation and distribution, but high volume rings a very loud bell from time to time. These power spikes represent influential events that leave their footprints on the underlying trend for weeks to come. But high volume won't trigger an entry signal all by itself, so you need to stalk your prey until it does.

Understand the real purpose of market scanning. Traders spend long hours trying to build scans that spit out perfect gems and no losers. This obsession actually undermines their considerable efforts. Scans are wake-up calls for your watch list, nothing more and nothing less. They uncover market patterns that need to mature before you take action. In fact, good scans will increase the trader's workload, not decrease it.

Read The Volume

The power spike searches the market using two calculations that track the relationship of recent volume to an intermediate moving average of volume. The first scan element flags a stock when daily volume equals or exceeds three times the 50-day moving average of volume.

V >= 3*[MA (V,50)]

But significant activity can also stretch across a series of days. Each individual bar may not qualify as a power spike, but the end result remains the same. In the second scan element, daily volume must equal or exceed two times the 50-day moving average of volume for two days in a row.

V >= 2*[MA(V,50)] AND V[-1] <= 2*[MA(V,50)]

Take the output and categorize the stocks by the patterns in which the volume appears. These generally fall along the lines of breakouts, breakdowns, climaxes and silent alarms. Most power spikes don't show good patterns and should be discarded immediately. The most effective work flow takes the most promising stocks and puts them on a watch list where they can be reviewed on a daily basis.

Price surging through support or resistance on power-spike volume confirms that the breakout or breakdown is real and should be sustained. But entering a position right after the spike is a bad idea, because those profiting from it are already looking for an exit. So wait for a pullback or congestion pattern that gives you a lower-risk entry.

Power spikes that follow long trends flag exhaustion moves and significant reversals. Look for confirmation through relative strength indicators that push into overbought or oversold territory and quickly reverse. These climax spikes can print highs or lows that persist for months. They also provide good exit signals for traders who are already positioned in the direction of the prior trend.

Drop down to a lower time frame chart when you see a climax spike, and see what type of reversal is getting set up. You'll often find a small double bottom or top that gives you a reference point for entering a low-risk position. Other times this close-up view will reveal ledges or triangles you can use to place your stop loss after entry.

Silent Alarms

Market hotspots trigger silent alarm spikes -- high-volume events that take place within narrow congestion. These events reflect intense crossroads of buying and selling pressure, where volume swells but price sits still because of a standoff between bulls and bears. The best trades come when high volume prints at the same price level it did in past retracements. This suggests a zone where big players are making big commitments.

Silent alarms taking place within narrow range bars promote a very simple trading strategy. Stand aside when you see the event, but take a position in whatever direction price moves out of that bar's range. The market should break out or break down very quickly after thrusting away from the silent alarm bar.

Watch out for preplanned activity that negates the power spike output. A high-volume event may not arise from an emotional crowd at all. A company could be issuing a secondary stock offering of many millions of shares, or a significant investment by a single holder could be scheduled to execute on that date.

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Finger Finder

Technicians throughout the world have adopted the Japanese practice of candlestick charting. In fact, many have abandoned Western bars in favor of this visual tool that generates detailed information from short-term price movement. Of all candlestick patterns, single bar hammers and dojis provide the most versatile immediate feedback. Western technical analysis rarely offers such dependable single bar signals.

Hundreds of stocks printed long-legged dojis and hammers during a dramatic reversal day. DELL didn't return to test its low for over 2 years after this death-defying leap. Pay close attention to gap support or resistance created by the bar following the candle event.

Price returns to test ALTR's new high doji and reverses. Zooming in and reviewing the 5-minute chart uncovers a classic double top scenario. Aggressive traders often enter short sales at doji tops, recognizing their hidden power.

These formations print when a significant battle between bulls and bears ends in a draw. Two characteristics generate their predictive power:

1. High to low range greater than average.

2. Closing tick equal to or near opening tick.

Dojis represent perfect opening-closing balance as price finishes exactly where it started. Hammers need only close so that the central body of the candlestick is less than one-third the length of the bar's total range. But the body must sit near one end of the bar's action.

Dojis and hammers predict immediate reversals within the time frames they are created. Their significance directly relates to their position within the overall chart pattern. When appearing on high volume near significant highs or lows, they may represent price extremes signifying an important change in trend. If printed within an ongoing congestion pattern, they often reflect market makers or specialists "cleaning out" stops in one direction so they can move the market in the opposite direction.

Focus On Day Trading

MSFT prints a classic double bottom marked by a doji and hammer. Note how other fingers on this 5-min chart flagged key reversals for the day's action. Highly liquid stocks have such high tick to tick participation that traders can use intraday candlestick patterns to initiate effective entry and exit decisions.

Combine chart pattern signals, such as candlesticks, with swing indicators to reduce whipsaws and improve profitability. For example, short length Stochastics provides an excellent overbought-oversold measure to cross-verify entry and exit.

Retracement science assists traders in predicting events subsequent to one of these important candles. Shifting down one time frame from the bar reveals the length of the short-term trend being reversed by the long finger. Very often, dojis and hammers represent first rise/first failure setups within the smaller time frame. This further predicts where the reversal momentum will fade for a test of the candle.

Following a doji or hammer reversal, a test of the candle high or low often takes place within 3 to 5 bars. When the test fails, expect price to thrust sharply forward, especially when overbought-oversold indicators show no divergence. When the test succeeds, shift down one time frame again and trade the setup according to double bottom/double top strategy. Specifically look for price to surge on the breakout past the high/low of the initial reversal generated by the candle.

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Coiled Spring

Markets cycle continuously through bursts of intense activity, followed by periods of relative calm. This natural pulse of inhalation and exhalation allows price to step sharply toward a new level, thoroughly test its boundaries and continue forward (or reverse) after new range resistance is established. As this test evolves toward its final outcome, a stock may exhibit key characteristics of an impending vertical breakout. Smart traders can identify the signature for this Coiled Spring move and make their play well ahead of the crowd.

After a healthy 15-point rally, INTC's low volume price drop flagged the eruption of a Coiled Spring breakout. Following a series of narrow price bars, the expansion day at 85 triggered a runaway 10-point continuation move.

The Coiled Spring arises from continuation of a dynamic trend. The relative power of the last ramping move predicts the inclination (declination) of subsequent price thrusts. Therefore, vertical movement must characterize those price bars. Odds further improve when two moves of the same angle have already taken place, but decrease for three or more prior thrusts.

Visual inspection of price bars within the congestion must demonstrate narrowing range, i.e. overall decrease in average length of the bars or candles. The odds for an impending Coiled Spring breakout increase when the current bar is the narrowest of the last 7 bars. And when each of the last two bars are the narrowest of the last 7, a dynamic breakout (or breakdown) is imminent.

Focus On Day Trading

Narrow range bars can be utilized on intraday charts under certain circumstances. Due to lack of liquidity, avoid them on all but the highest volume stocks. Also, insist that their appearance coincides with key support, resistance or other meaningful price levels. And upshift to a 15-min bar chart to capture a better view of short-term conditions.

Under the best of circumstances, traders risk entering a dead market using only narrow bars to choose entry on either 5-min and 15-min charts. But when all other factors converge, as they did with Concord's impressive rally, NR7s provide a valuable cross-verification measure for your day trades.

Volume must trend sharply downward as the congestion progresses. Any volume spike not producing an immediate breakout, but violating the downtrend of the short-term volume, negates the trade. General price movement should counter the prevailing trend. The most powerful CS breaks will occur after price swings sharply against the trend but not violate any significant support or resistance. Use NR7s (narrowest range of the last 7 bars), volume and moving averages to pinpoint the terminus of this counter-trend extreme.

Examining patterns within the next lower time frame will reveal effective trade entry points. Congestion between powerful trending movement frequently appears as a 1-2-3 wave against the trend. Cautious traders also closely review the next time frame above the one under evaluation. Large-scale price development may produce support and resistance not previously considered. Finally, if the larger scale trend is opposite to the current trade, the congestion zone may not immediately resolve into another profitable thrust.

Range Bar Analysis

Futures markets have used range bar analysis for years. A classic on the subject, Toby Crabel's Day Trading with Short Term Price Patterns and Opening Range Breakouts, investigates how expanding candle and bar patterns characterize momentum in many commodities and indices. The emotional crowd provides fuel as bar range stretches in the direction of the prevailing trend. Finally, a climax bar prints a sharp reversal under surging volume.

Computation indicators (such as Stochastics) measure bar range indirectly. By going straight to the bars themselves, visual analysis yields profitable short-term prediction. However, not all markets can be accurately examined through range changes. Low volume stocks, for example, carry high spreads that will distort signals. Limit bar analysis to highly liquid markets with low spreads and high average daily movement.

Short-term traders should closely examine small price bar formations. Narrow and wide range bars signal measurable change within the crowd and impending price movement. One classic pattern is NR7, the narrowest range bar of the last 7. These predict breakouts that can be safely traded in the direction of the first impulse.

Movement out of a NR7 tends to continue in the direction the NR7 bar is first violated. This tendency allows for a tight stop just beyond the range extreme opposite to the position taken. In CSCO's chart, note how this violation signaled an immediate 8% to 10% thrust.

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Bear Hug

The 1990s bull market taught painful lessons to traders seeking profits from a stock's decline. In fact, many abandoned short selling entirely, and just chased popular momentum plays. Of course, recent years have changed all that. Traders now make strong plays in both directions to capitalize on the market swing. But its important to save your cash for the best opportunities by choosing setups that flag imminent selloffs.

Entry points for short sales can be chosen in several ways. The key is to sell at resistance where risk is at its lowest. Look for multiple types of resistance converging at narrow price zones. These offer the highest reward at the lowest possible risk.

The shallow rise against the uptrend set up a weak support line defining the breaking point for TLAB's subsequent, stomach-churning drop. The last bar before the break also triggered a Coiled Spring signal.

Ironically, the completion of a short squeeze generates excellent conditions for short sales. As upside momentum fades, supply-demand imbalance shifts to the sell side so market players can reverse the short-term trend. Using Fibonacci retracements, traders can measure a squeeze better than their competition. This forced rally shouldn't carry beyond 62% of the prior fall without real buyers.

Don't chase a rapid decline with a market order. Without up ticks, you can get crushed on a bounce just after getting filled. Safe exits vanish and risk escalates dramatically when chasing downside momentum. The best strategy is to avoid short sales entirely during the selloff and wait for the market to bounce up to resistance, before taking action.

The first rally into a sharp down gap provides a near-perfect short sale entry. When the gap marks a breakdown from a top, search for a stop gun low (doji or hammer) near the bottom of that pattern. The low bar flags where rising price will most likely roll over. But watch out. Price sometimes gaps back in the opposite direction. In that case, exit trades immediately because it negates the sell signal.

Focus On Day Trading

Enter intraday short sales after weak rallies to resistance. Look for short-term topping patterns and wait for relative strength to turn downward, before taking a position. Note how subsequent breaks of support trigger immediate declines during this AMCC correction. The best entries for short sales lie near key resistance levels, so stops can be placed on the other side. Sell signals in the direction of the daily trend tend to be more effective than those against it.

Low risk short sales appear when price constricts into a tight range, and volatility falls off. Take a short position within this quiet zone while random up ticks allow easy entry. When the trade works, price will sell off very quickly. But exit immediately if the market moves against your position. This trade has an excellent reward:risk profile when other factors support the decline. Even without cross-verification, you'll know immediately when the trade fails and can cut your losses economically.

The decade-long bull market has ended. This improves the odds your short sales will be profitable. Rallies during weak markets offer the best environment for short selling. However, smart traders can locate weak stocks in any conditions. Concentrate your efforts on stocks in downtrends before tackling the more difficult task of trading intermediate corrections in uptrends.

This bear market decline generated at least 5 good short sale opportunities. Each step of the decline printed a low risk entry when price tested the prior break in support. While horizontal resistance marked a barrier in the last 4 trades, note how the first test arose from a break of the 50-day moving average.

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Hole In The Wall

When planning new gapper trades, the Hole in the Wall should be your first stop. Edwards and Magee briefly mentioned them in their classic Technical Analysis of Stock Trends. In the section on trend theory, they discuss an Island Reversal's important second gap (the one that "completes" the Island). E/M refer to this move as a counter trend Breakaway gap although it doesn't follow the rules they themselves provide on the subject.

While the Hole can mimic a Breakaway gap, it also contains unique properties. The counter trend shock triggers predictable price movement the trader can exploit for quick swing long entries and short sales.

E/M identified gaps by their physical momentum properties and forecasting value. Breakaway, Continuation and Exhaustion gaps defined clear focal points of price action that were seen over and over again in dynamically trending issues. But beyond these few formations, the authors dismissed the balance of gapping throughout the market universe as having no forecasting value. This is simply not true.

While classic definitions were once adequate, their work on the subject now lacks depth for the active trader. And unfortunately, the current trade dogma asserts that everything there is to know about gaps has been written.

The forecasting value of gap behavior goes well beyond the E/M world. The study of Gap Echos alone yields tremendous new insight on entry and exit strategies. And characteristic gaps as significant as the Big Three have always existed for the trader to identify and use.

Hole In The Wall

Sharp, downward gap following the conclusion of a rally. The Hole ends the preceding trend and may trigger profitable trading conditions:

• Breakaway gap signaling the start of a dynamic trend in the opposite direction.
• Counter trend move flagging sideways swing trade opportunities.

This price shock occurs in all time frames and can be used for both day trading and position trading. In either case, seek short sales and brief long side swing entries until the Gap is closed.

Focus On Day Trading

Hole-in-the-Walls can trigger excellent day trades. Occasionally price may even undergo a significant gap intraday although this is rare. More frequently, the gap will appear at the open of a multiple day intraday chart. This gap may or may not eventually signal a Hole in the larger daily chart. But the day trader's advantage is that confirmation within the shorter time frame comes much more quickly. The best trades may come after waiting for the short-term bottom, as with the larger Hole trade. Odds are very strong the gap will not close if it remains open after the first hour of the gap day.

Old Traders Tales

There's an old expression: gaps get filled. However, this is not always true. When Edwards/Magee popularized gaps 50 years ago, they described three types of trend gaps:

• BREAKAWAY: as a market breaks out into a new trend move, up or down.
• CONTINUATION: as the trend goes runaway with enthusiasm or fear.
• EXHAUSTION: as the trend burns out with one last surge.

Both breakaway and continuation gaps are excellent trade entry points when the trend first "pulls back" to test it. Those gaps hold support/resistance on the first test the vast majority of the time, providing a low risk-high reward entry.

The exhaustion gap fills easily and warns that the trend preceding it is over. Very often, the first test of a continuation gap occurs AFTER the closure of the exhaustion gap. It's still an excellent trade entry point but the trader needs to remain aware that the subsequent rally is likely to fail before testing that closed exhaustion gap from the other side.

The most effective trading strategy doesn't chase a short sale immediately following a Hole. Instead, wait for the first downdraft to complete and reverse. A quick swing long can be initiated here but expect the bounce to fail. The best short opportunity comes during the completion of this next rally. Use a Fibonacci grid to lay out the move from the short term high to the post-Hole climax low. Calculate an appropriate entry point from analysis of this grid. This rally should never complete more than 62% (allowing for "noise") of the prior downdraft before failing at least once. And the Hole should not fill without an opposite gap of similar magnitude.

Each trader's time frame will bring its own exit rules. However, entry zones should be similar regardless of intended holding period. The lowest risk entry takes place during the rally back into the Hole. The simplest exit follows the subsequent downdraft. Defensive measures must be exercised with this formation as the stock still carries high relative strength and finds many willing buyers. Use cross-verification techniques to locate multiple confirmations for your timing and risk:reward conclusions.

Fibonacci Measurement

When MOT gapped down in a 1997 Hole, the initial decline ended at a 38% Fibonacci retracement of the 4 month trend. This popular percentage provides a powerful floor for first declines. A subsequent rally retraced almost 62% and died. Look at the typical 1-2-3 nature of the bear rally. Notice one Adam and Eve double top embedded within a smaller, second one. A sharp, quick first peak followed by a more gradual lower second peak characterizes these dependable reversal patterns. If you missed your entry at the first retracement, secondary entry points appeared as Eve rolled over and the short term lows were broken.

Trading Tips

• The Hole itself provides an excellent cross-verification point. Regardless of retracement percentage, price should never take out a Hole on the first try, unless regapped.
• Markets that hold above their intermediate (50 day for position traders and 13 period 5-min bars for day traders) moving averages following a Hole are stronger than those that violate them. Use more defensive exit strategies until violation of this average occurs.
• Use Gap Echos as entry and exit points. Price remembers prior gap activity and will try to reverse, at least once, as these areas are approached. See MOT's red line continuation gaps in the illustration above for examples.
• Longer trends (and their pull back points) take precedence over shorter ones. Expect bounces to occur at 38%, 50% and 62% retracement points IN ALL TRENDS. Always know where these key levels are located.
• Skilled traders use all information at their disposal to develop a hierarchy of the importance of each bounce level. Trade profitability increases when positions are held through minor bounces following entrance but exited near major ones.

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3rd Watch

From THE MASTER SWING TRADER © 2012 McGraw-Hill and Brooke Publishers. All Rights Reserved

William J. O'Neil first defined the Cup and Handle (C&H) breakout in his book How to Make Money in Stocks. Since that time, Investors Business Daily and other popular journals have extended the folklore of this classic pattern. But to this day, few swing traders recognize this formation's versatility or its appearance through all time frames and markets.

The generic pattern looks like a rounded cup with a small handle and represents a breakout through a triple top. Price rallies into a first high, reverses and then pulls back to form the left side of the cup. The issue eventually finds support and builds a sideways base. A new rally erupts and rises toward the old high. This forms the cup's right side. Sellers appear at the double top and the market pulls back a second time. The next decline draws the smaller handle as price again stabilizes, but this time at a higher level than the last retracement. It then rises into a 3rd rally and breaks out sharply to new highs.

Classic Cup & Handle Breakout

Idec Pharmaceuticals draws a perfect C&H pattern through both price and time. The cup takes approximately 3 months to form, while the handle does its job in just 1 month. The handle drops into a classic 50% retracement before ejecting strongly through overhead resistance into a dynamic 100% rally.

Look at the market mechanics beneath this pattern. After the first high, price pulls back sharply before it bounces. This forces oscillators to roll over and encourages longs to exit positions. Swing traders then enter new short sales when price approaches the double top test. This contributes to fresh selling pressure and forces price to pull back again. It eventually reaches support while indicators recover from oversold levels. Longs then sense a new opportunity and build volume back toward the old highs. This forms a handle base that discourages further selling and builds accumulation. Price reaches the high for the third time and breaks out.

Volume must support price action for the new rally to succeed. The original O'Neil approach demands that breakout volume rise at least 50% above the 50-day volume moving average before the new high. It searches for candidates that show more participation on up days leading into the breakout than down days. The classic definition also filters volume action within the cup itself. The rising days on the cup's right side should print higher volume than both the falling days and the 50-day VMA.

These strict requirements lead swing traders to misunderstand this pattern's power. Many predictive C&H formations never meet these standard definitions. Handles can retrace deeply or actually build a base at new highs above the cup. Volume can break all the rules as the pattern forms but still show excellent accumulation by the time the breakout erupts. And a deep handle may even push toward the low of the cup's bottom before the final rally begins. 3rd Watch seeks the classic pattern but cuts the dimensions in half. It locates breakouts that occur within 6-month highs rather than 52-week highs. The handle language in the scan captures many variations of this complex formation. It only requires that the market print no new high within 4 weeks of the signal. This allows a short base and pullback before the stock erupts through the barrier. 3rd Watch also looks for volume to spike at least 150% of average on the breakout bar.

Congested Handle

Immunex breaks through 4-month resistance and the 52-week high as the FDA approves a key arthritis drug. Note the November congestion right under the first high and the strong breakout.

Use 3rd Watch strategy to trade all triple top breakouts. While the scan outputs a specific type of C&H, the markets draw this pattern in many unique ways. Both ascending triangles and rectangle formations rely on the same price mechanics. Parallel price channel resistance often breaks on the 3rd high as momentum triggers bar expansion. Sometimes relative highs will print at an equal distance to each other, rather than in a proportional cup and handle. This powerful setup offers swing traders valuable insight and profitable tactics for all of these breakout incarnations.

The handle location provides important accumulation feedback. Volume tends to lead or lag price, especially at new highs and lows. When the handle forms below the cup, it suggests that accumulation needs to build further before a breakout can proceed. Alternatively, congestion right above two old highs denotes a very strong market that should trend sharply once it completes the new platform. Also keep an eye out for a double handle formation. This odd pattern forms a base on both sides of the two old highs. When this Cup and Two Handles (C&2H) starts to print, measure the last trend just below the first handle. Add that length to the bottom of the second handle to estimate a price target for the next rally.

Focus On Day Trading

Sharp traders can locate 3rd Watch formations on intraday charts, as well as daily and weekly ones. This important variation of the classic Cup and Handle provides a welcome addition to the day trader's toolbox.

3rd Watch offers excellent intraday trades. The setup carries few of the restrictions that limit most other Bells in the short-term environment. This dependable pattern appears frequently on short-term charts and encourages many quick profits. In addition to simple highs, look for first hour range to break on the third try. Even scalpers can apply effective Watch strategy. Locate intermediate highs on the 1-minute chart and trade quick thrusts or tick breakouts above that level.

Major intraday setups tend to peak in the last hour. A strong trend often reaches a first climax early in the day, and spends several hours testing its new range. Positive bias then carries price back towards the intraday high late in the day if the market stays strong. This encourages new speculators who hope for another trend leg, or who want to buy in anticipation of a continuation move the next morning. Sometimes markets will close just as price reaches the peak, but doesn't eject. Odds then favor a strong breakout gap when trading resumes.