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"The market is a treacherous and fascinating game. I am a player and this is the quiet place i go to pen my thoughts and emotions."

Friday, July 07, 2006

Perspective/Chart: The Current Common Theme

PerspectiveChartThe analysis of Hengxin's chart prompted me to notice a common pattern that has emerged in the current week. Some of the stocks I monitor have displayed a common breakout pattern in the form of the cup and handle formation.

The psychology of the cup and handle formation can be explained as such:

It is a good example of matching sentiment with chart patterns. It starts with a huge selldown from a peak. then it consolidates and subsequently runs up again till it hits the previous peak. This is the cup. After that, it goes into a sideways motion, often slightly downtrending. This is the handle. Finally it runs up again, completing the cup and handle formation.

Why will the price retreat into a sideways motion after hitting the previous high?
Ah, this is the memory of price. buyers from the last peak and selldown finally saw that they can breakeven after holding for so long and starts to sell. This breaks the uptrend for a while as the buyers start to reconcile with the sellers until the sellers are satisfied with. Then, the uptrend resumes.

Here are some of the current charts displaying this formation:

This formation has been present in many of the china stocks. Open out your ChartNexus software and try to spot them!

Hope this helps!

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