|The large rounded bottom that formed the cup took almost nine months to complete, while the handle area had a much shorter duration -- less than two months -- until Grant Prideco (GRP) broke away from the $16 level. Volume is always an important component when trying to judge the future performance of this pattern. It should rise significantly at the moment of the breakout from the handle pattern. In this case volume exploded on that day and the stock gapped up, surpassed the $16 level.|
|Graphic provided by: MetaStock.|
|Considering that the gap formed when the stock broke away from a consolidation area (the handle) and the high volume on its formation, it can be assumed to be a breakaway gap. These types of gaps have forecasting value, as they can be the beginning of new trend.|
|By itself, the formation of a cup with handle displaying high volume at the time of the breakout is enough to predict higher prices for GRP. The reliability of this forecast is, however, strongly increased by the simultaneous occurrence of a breakaway gap. |
You can calculate a price objective for this security by measuring the height of the formation, from the lowest price in the cup to the price at the breakout level, and add this number to the breakout price. In this case the price objective is ($16 - $10) + $16 = $22. This is the minimum price target.
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