Saturday, April 7, 2007

Microvison Cup & Handle Conformation

The classic Cup and Handle is a formation I have traded for quite some time. I like it primarily because of its reliability and easily recognizable configuration within the charting landscape. The pattern also makes considerable sense with relation to buying and selling pressures.

A stock will form an initial high creating the left upper edge of the cup. From there, selling pressure escalates as the bears take control. Eventually, equilibrium is reached and subsequently a base is formed as the bulls and bears stalemate. Momentum starts to build as the bulls regain control and the stock moves to test the previous high, only to be met by resistance. Finally, the stock becomes range bound on light volume, effectively creating the handle.

One important fact-regardless of how picturesque the formation may appear, the pattern isn't complete until previous resistance is broken by a high volume move.

Extending Microvision's daily chart to the duration of one year reveals a Cup & Handle identified by two concentric highs in the low $4.00 range(resistance), a basing period through the second half of 2006(cup), and a classic low volume pull back(handle). As I stated before, conformation was still needed. On April 3rd and 4th, as MVIS neared the $4.00 resistance mark volume surged(x2 daily average) and powered shares to a new 52-week highs of $4.35 breaking previous resistance. Most importantly, on April 5th shares were able to close above resistance conforming the Cup & Handle formation.

Now with conformation we need to estimate the target price of Microvision's breakout. According to the projected advance of a successful Cup & handle can be estimated by measuring the distance from the right peak to the bottom of the cup. Ergo, the deeper the cup the more significant the advance. For simplicities sake I will round my estimates to whole numbers.

With a conservatively estimated bottom at $1.40 and a high of $4.10, Microvision's target price per share can be estimated as follows:

4.10 - 1.40 = $2.70

(2.70 / 1.40) x 100 = 192% or 1.928

4.10 x 1.928 = $7.90

No comments: