NEC: Cup With Handle

12/21/04 09:27:28 AM

by Chris Manuell

The recent depreciation in the yen has provided welcome relief for some Japanese stocks; NEC appears to have benefited following a decline since April.

Security: NEC
Position: N/A

Japanese stocks are closely linked to the direction of their currency, in particular the exporting companies; the recent decline in the yen has allowed NEC to develop a potential bottom. A potential cup-with-handle has unfolded on the daily chart of NEC (Figure 1), which should mark an end to the recent decline from April. The pattern is characterized by the cup or horseshoe formation, and then a brief retracement back into the vicinity of the cup to form the handle. The pattern would be completed on a decisive violation of the right lip of the cup at 6.30. The U-shape of the pattern was marked with a double-bottom formation, as the market appeared to make a significant low in the 5.30 region

NEC also appeared to complete a breakaway gap in early December, which helped form the right lip of the cup. The heavy volume formed on that gap is supportive and reinforces the probability that a significant move is under way. The inability of the recent retracement to fill the gap and support encountered at the 50-day moving average (MA) suggests that the market is preparing for a launch on the critical pivot point of the cup formation at 6.30.

Figure 1: Daily chart, NEC. A potential cup-with-handle has unfolded on the daily chart of NEC, which should mark an end to the recent decline from April.

Graphic provided by: StockCharts.com.

Indicators also support the theme that the intermediate decline may also have finished. The average directional movement index (ADX) peaked around the 40 level, which coincided with the failure of NEC to break to new lows and signified an end to the downtrend. The ADX is currently crouching beneath the important 20 level, and a push up may provide the stimulus for a completion to the cup-with-handle formation. The relative strength index (RSI) has also migrated into the zone that characterizes a bull market, with a bounce from the 40 region into the 70 territory.

Chris Manuell

Chris Manuell spent 7 years as a futures sales/trader for a large investment bank and more recently as a technical analyst for an independent research company. He has a bachelor of economics and graduate diploma in applied finance & investment. Currently enrolled in the CMT program with the MTA.