This Cup & Handle Breakout Depicts ‘30%’ Upside!
Cup & Handle chart pattern is generally formed in the middle of a rally and is an indication of a temporary pause or a halt. This is normal behavior for a stock after a rally, however, when it takes the shape of a trend-continuation chart pattern such as a Cup & Handle, then one can expect a good rally upon a breakout.
One stock that has delivered a breakout from this chart pattern amid a stellar rally is Sterling Tools Ltd (NS:). It is engaged in the manufacturing and marketing of high-tensile cold-forged fasteners, having a market capitalization of INR 1,058 crores.
Image Description: Daily chart of Sterling Tools with volume bars at the bottom
Image Source: Investing.com
On Monday, there was an unexpected rally of 14% on the back of a volume spurt of 1.26 million shares, which is not a common volume figure for this counter. After taking a breather in the next trading session, today, the stock again rallied 8.52% to INR 318.9 with an even higher volume, delivering a weekly gain of over 25% so far.
In fact, the weekly volume skyrocketed to 3.61 million shares which is the highest since July 2021, and there are still 2 sessions left for this week. This kind of volume is so surprising that even the exchanges took note of it and sent a notice to the company to justify this, to which the company replied that it is purely a market-driven action.
Combining this unusual volume activity with a massive price gain, the reliability of the Cup & Handle breakout increases exponentially. As can be seen from the chart above, the stock is comfortably trading above the resistance level of the pattern, which is around INR 305. Once the stock closes above this level on a weekly closing basis, then investors can expect a huge upside potential from thereon.
As per the dimensions of the pattern, an upside rally to sub-400 levels could easily be seen. As this is a slightly longer-term analysis, the target could take their own sweet time. Investors who are willing to capitalize on this opportunity should consider waiting for a dip of around 5% from the CMP to get better entry levels.
The low of the handle part of the pattern should ideally be the exit level for long positions, which is around INR 230. This might seem a bit deep, but the expected upside potential is also sufficiently high.