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The Most Successful Base Pattern is Seeing a Pickup in Breakouts; Here Are Two Examples

Last week, the S&P 500 posted a modest 0.2% gain, which puts it within points of a 4-month base breakout at 4607. In addition to a breakout, a move above this level would put this Index above its July high, which is a key area of possible resistance. Of note, a lengthy base breakout often precedes a lengthy advance, such as the early July period this year, when a 4-month base breakout occurred ahead of a 9.6% gain for the S&P 500.

Currently, the broader markets are in an uptrend, which makes screening for stocks emerging from bases even more exciting. Today, I’ll be focusing on recent cup-with-handle base breakouts. Among the eight primary base patterns, the cup with handle remains to this day one of the most successful. This chart pattern was identified by William O’Neil during his decades-long research uncovering the commonalities among winning stocks that go on to outpace the markets. Other characteristics in addition to the chart are also present in these winners, as you’ll see in the examples below.

Daily Chart of Royal Caribbean Cruises (RCL)

Royal Caribbean Cruises (RCL) posted a cup-with-handle base breakout this month, amid news that travel had picked up considerably over the Thanksgiving holiday. Of note is that the right side of the base for RCL did not reach the late July high in price. In addition, the breakout occurred on above-average volume, indicating accumulation. The buy point is above the high of the handle and shown by the arrow. From there, RCL has since entered an uptrend as the stock finds support at its upward trending 5-day moving average. Using the June period a precedent, RCL has further upside potential from here.

Daily Chart of IDEXX Laboratories, Inc. (IDXX)

IDEXX Laboratories (IDXX) posted a cup-with-base breakout on Monday, following two Wall Street price target upgrades for the manufacturer of diagnostic products for the veterinary market. Analysts were impressed by the growth prospects presented by my management at an industry conference earlier this week. While the RSI is in an overbought position on the daily chart above, the weekly chart of IDXX has just posted a positive MACD, with the RSI below an overbought condition. This puts the stock in a bullish position for the long term.

As noted, a successful cup-with-handle breakout is coupled with several other characteristics, such as above-average volume on the handle breakout that’s been spurred by positive news regarding the outlook for growth. In addition, both companies above have recently reported strong earnings that were above estimates. As with all base breakouts, the probability of success is greatly increased if the broader markets are in a uptrend.

The necessary ingredients for a successful cup-with-handle base breakout discussed above are currently present among select homebuilding stocks, which are breaking out amid pent-up housing demand coupled with lower mortgage rates. We’ve highlighted two of these stocks as strong buys on the Suggested Holdings List of my twice-weekly MEM EDGE Report. If you’d like immediate access, use this link here for a low-cost trial, which can be halted at any time. This timely report will also alert you to any shift in our currently bullish outlook for the markets, as well as sector rotation that’s shaping up for next year.


Mary Ellen McGonagle

MEM Investment Research

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