While a good cup with handle
takes at least seven weeks to form, a saucer pattern built by a superb stock
can take shape over several months or a year or more (Rob
Schreckhise/Shutterstock)
The saucer is typically longer
and thus looks shallower in depth than its close relative, the cup base.
You
might see a correction of about 12% to 20% from the highest price within the
saucer to the low, but it could be up to 30% or more in down markets.
While a good cup with handle
takes at least seven weeks to form, a saucer can take shape over several months
or a year or more. As a result, saucers can be hard to see. They’re often
visible only on a weekly chart, or sometimes even a monthly. As with cups, the buy point is 10 cents above
the left side high of the saucer. Sometimes a handle will form, often offering
a lower buy point.
In many cases, saucer bases are
formed by big-cap stocks because they tend to be slower moving. Smaller,
faster-moving growth stocks typically form shorter winning patterns. In other
cases, stocks form saucer bases when the general market is moving sideways.
Because the saucer tends to take
more time to unfold, stocks that form the pattern may have weak Relative
Strength ratings when they break out above their buy points. The RS Rating
compares a stock’s price performance over the past 12 months to other stocks.
It naturally penalizes stocks that form long bases. So a stock that forms
saucer bases may have an RS Rating of, say, 50 or even lower, compared to
ratings of 85 or better for top growth stocks.
Nevertheless, a great breakout
from of a saucer base in big volume, by a company with excellent fundamentals
and strong fund sponsorship, is still capable of producing strong gains over
time.
AutoZone (AZO) cleared a 161.43
buy point of a 41-week saucer with handle on Feb. 16, 2010. The RS Rating was
only 37, but offset by a Composite Rating of 79 and an EPS Rating of 92. The
auto parts retailer was enjoying strong demand for parts from customers who chose
to hold onto their vehicles longer rather than trading them in for newer
models.
ICch-AZO-032816The base showed a
correction of just 17%. The handle formed in mostly light volume, and the
stock’s relative strength line was rising as it broke out — all good signs.
Volume on the weekly chart was
just 3% above normal on the breakout, but it was a respectable 33% above
average on the daily chart. Then volume on the weekly chart picked up to 73%
above normal just two weeks after the breakout. Sometimes volume can kick in a
bit late with a breakout, but the move still works out.
Over the next 10 months, AutoZone
rose steadily up its 10-week moving average to a peak of 276 in the week ended
Dec. 31, a 71% gain from the breakout.