ESI Offers Great Example of Cup & Handle Pattern

ITT Educational Services (ESI) successfully broke out of a cup and handle pattern in January that was almost picture perfect. With the stock holding up at higher levels ESI makes for a great addition to our stock chart education archives.

The Cup and Handle pattern was made popular by William O’Neil of Investors Business Daily. It is an integral part of the CANSLIM Style of trading and is very often found during bull markets.

For this stock chart of ESI first take note that it is a weekly chart showing the last two years of trade history. Next look at the Grey #1 and follow the line to see a raw outline of the Cup and Handle pattern leading up to the proper buypoint at Grey #5. This is what we are focusing on.

esi-cup-with-handle

1. The Cup and Handle Formation – By following the Grey line a general outline of a cup and handle can be seen. Note this pattern took over a year to form in its entirety.

2. Volume increases on the back end of the cup – After bottoming a strong rally should take place with several key accumulation volume weeks. Heavy volume, the number of shares traded per day, tells us that institutions were buying into the rally and gives the stock new life. ESI peaked out at $106.75 before beginning its formation of the handle.

3. Uncertain investors are shaken out to begin forming the handle -Volume increases naturally as ESI pulls back after its huge rally from $42 to $106. This begins the formation of the handle and is a key shake out area for investors who were holding the stock “long” way back when the stock was trading over $100 in mid 2008.

4. Volume declines leading into the breakout – Critical to the pattern volume consistently declines as the right side of the handle forms. This can be seen as the calm weather just before the storm. Investors are satisfied with the current prices.

5. ESI breaks out on heavy volume – By looking closely at a daily chart ESI actually failed its first breakout attempt when it pushed above $92.50 due to lack of volume. But the stock came storming back to claim higher highs the very next week (first week in January 09) with surging volume. The stock ran over 40% from here over the next month. Point #5 was the proper buypoint for this pattern.

6. A new base begins to form – By looking at the red line of resistance we can see that ESI has found resistance around the $132 price level which is where the stock peaked in in October 2007. Moving forward ESI will need to form a fresh base over the next several weeks. Keep close watch as a heavy volume move back above $132 is the next buy point for investors looking to get in.

More stock chart examples and lessons below.

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