How to Find Potential Handle Troughs within Bases

Note:  This article is meant to help you learn from the market and does not serve as investment advice for any specific group or individual.  For more information, please read the HSR Terms of Use.

Benefits of Learning How to Find Potential Handle Troughs within Bases

There are several benefits when you learn how to find potential handle troughs using Right Side Curl with Reaccumulation.

Here are 3 benefits that come to mind:

1.  Minimize Missed Profit Opportunities

Identifying handle troughs can help you spot a stock that may be getting ready to break out of a base.

For breakout buyers, this may help you set an alert or just make you more aware of a stock that's showing positive price action in a key alert zone.

2.  Helps Diversify Entry Strategies

A base breakout is one common way to enter stocks.

Identifying handle troughs gives you another option to consider before a base breakout.

This may be helpful for institutional investors who can't make their first decision on a breakout or for investors who prefer retracements over breakouts.

Handle troughs won't always work and you should definitely use a stop loss to protect your downside risk, but it's another way to identify potential reversal points in stocks.

3.  Builds a Profit Cushion to Withstand Shakeouts

It's better when there's a move higher that provides some cushion to a recent position, but some base breakouts can test your patience/discipline.

Starting a partial/initial position at a handle trough, may help build up a buffer if price moves through the base's pivot point.

Now - this assumes that price doesn't stop you out of your handle trough entry first, which is always a possibility.

In my Schlumberger (SLB) example, a base breakout entry would've been stopped out using a 6 to 8% stop loss (see chart 1, page 3).

In contrast, a handle trough entry would have kept you in the stock and in position to capitalize on SLB's 245% run towards its 2007 top.

SLB's advance was not an easy one to stay in because it didn't go straight up like many investors expect, but it also never showed any technical signs of breaking down. 

SLB made a series of higher lows before it got going to the upside (see chart 1, page 3).

When a stock fails to meet our expectations, many investors (including myself) have a tendency to bail on a stock idea in search of the next great stock.

This often backfires and that's why it's always a good idea to understand the fundamental story behind a stock. 

The more you know about a stock, the more likely you are to stick to your plan/rules unless it hits your stop.

Ways to Increase Confidence in Potential Handle Troughs within Bases

Base entries can create a lot of uncertainty.

Will the stock ever break out or will it breakdown and hit your stop?

There are many ways that you can increase your confidence in potential handle troughs.

Here are some important technical factors that you may want to consider:

1.  Wait for the Handle Trough to Coincide with Confluence (40 Week EMA)

During uptrends, stocks may find support at their 40 Week EMA. 

If you combine Right Side Curl with Reaccumulation and support from the 40 Week EMA, you have just added confluence within a key price zone.

For those who use mathematical ratios, you could also add in a Fibonacci retracement on top of support from the 40 Week EMA.

Did you notice that my SLB example had its handle trough firmly grounded within a price thrust (right-hand side of base), support from the 40 Week EMA and a 0.618 Fibonacci retracement level (see chart 1, page 3)?

The more confluence on a chart, the better evidence you have for a potential reversal to the upside.

2.  Look for Strength in Peer Stocks

When you witness a reaccumulation week after a handle has formed, where do other group members stand technically?

Did they already break out or are they setting up in bases at the same time as your stock of interest?

Stocks within the same group tend to move together.

If you have confirmed base breakouts by other group members, your stock may getting ready to break out.

When SLB confirmed its reaccumulation week in 2004, there were other Oil & Gas stocks that had already broke out and some that were setting up in bases like SLB.

In late 2004, Diamond Offshore Drilling (DO) and TransOcean (RIG) were two Oil & Gas stocks that mimicked SLB's bullish base pattern.

They both broke out of bases on the same week (09/03/04), which was 3 weeks before SLB broke out (see charts 1-3, pp. 3-5).

DO went up 1,175% and RIG tacked on 435% before topping in 2007 and 2008, respectively.

Do you think that information is important?

I wrote more about combining Group Leadership and Right Side Curl with Reaccumulation here.

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