Tech Talk: The Cup and Handle Formation
This chart illustrates the behaviour of Aphria
Inc., a company
based in Leamington, Ontario, which provides medical marijuana to individuals.
It is listed on Canada’s Venture Exchange under the symbol APH.V. Other
licensed medical cannabis producers are searching
for opportunities to expand overseas while Ottawa works on its plan to
legalize recreational marijuana next spring.
This article is the first in a series
of articles I am writing on the use of technical analysis and stock-picking.
The main reason I have taken an interest in this stock is that Canada will make
pot legal within the next year. Companies like Aphria are in a good position to
benefit from trade in this commodity, production of which has begun to boom in
anticipation. (For the record, I own the stock but do not use the product.)
In the chart I have drawn in blue a cup and handle formation using two thick parabolic lines.
This indicator is typically quite bullish – often the precursor to a big upward
movement (a “breakout” which, of course, began a week ago.
There are a couple of other points
you should note in the graphic. One is that it uses 200-day (red line) and
50-day (blue line) moving averages. The more volatile 50-day line dropped
through the 200-day average last October, forming what is technically known as
a “death cross.” However, the strength of this stock in recent days indicates
that this situation will soon reverse itself. When that happens, the two
indicators form a bullish “golden cross” – an indicator of future strength.
The relative strength index (top
indicator) shows the stock as “overbought.” This will sort itself out as upward
movement in the stock moderates, and the indicator moves beyond previous share
price movements, which are still reflected in that indicator.
The lower indicator is the Percentage
Price Oscillator (PPO). A “momentum oscillator,” it measures the difference
between two moving averages as a percentage of the larger moving average. The
Percentage Price Oscillator indicates activity through a signal line, a
histogram and a centreline. In my view, it is the most powerful of the
indicators I use.
The chart also uses a couple of
other indicators that I find extremely helpful, including Parabolic SAR (stop
and reverse) and Bollinger bands. I’ll discuss those indicators in a later
post.
Just to be clear, my comments on
stocks are not buy-or-sell recommendations. Their only purpose is to describe
certain stock patterns and ideas, using current illustrations.
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