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.
