Story in a chart: 'Cup & Handle' pattern in Motherson Sumi suggests buying opportunity

A Cup & Handle reversal pattern forms after a downtrend, and its completion marks a trend reversal to uptrend.

C&H patterns are an integral part of technical analysis, but successful traders combine these techniques with technical indicators and other forms of technical analysis to maximize their odds of success.

In the standard Cup & Handle pattern, we connect the high after Cup with the high created after the handle. A trend line is drawn by connecting these highest points of the two peaks, which is called as 'Neckline'. This trend line is the most important component of C&H pattern.

Motherson Sumi is having a strong resistance line standing around Rs 84 levels indicating strong bullish breakout only above these levels. Recent formation of Cup and Handle pattern will give a breakout on a close above Rs 84 mark which suggests buying in the stock for higher targets of Rs 110. Volume can also add further insight while trading these patterns. Decent volume participation while giving breakout is also giving support to C&H pattern. Figure 1. Cup & Handle pattern and Buy signal on MOTHERSUMI

Buy signal

> A close above neckline (Rs 84) of Cup & Handle pattern will indicate trend reversal to uptrend.
> Short- term moving average 20 DMA (Rs 79) defines short-term trend is providing support to buyers as prices are sustained and trading above it.
> Mid- term moving average 50 DMA (Rs 72) defines mid-term trend is very well augur with bulls as prices are sustained and trading above it.
> Decent volume participation while pattern breakout will also give additional confirmation.

Profit booking

Target as per Cup & Handle pattern is calculated by adding height of Cup to neckline which comes to Rs 110. However, previous swing high comes near Rs 106.

Stop loss

Entire bullish view negates on breaching of Handle on closing basis and one should exit from long position. In case of Motherson Sumi, it is placed around Rs 72 levels.

Conclusion

We recommend buying Motherson Sumi Systems above Rs 84 with a stop loss of Rs 72 for higher targets of Rs 106/110 as indicated in above chart.

(The author is Head - Technical Research at Narnolia Financial Advisors.)

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