Cup and handle pattern in M&M suggest buying opportunity

Shabbir Kayyumi

The Cup & Handle (C&H) pattern is believed to be one of the most reliable and popular patterns among traders. In technical analysis, a C&H pattern describes a specific chart formation that projects a bearish-to-bullish trend reversal. A C&H reversal pattern forms after a downtrend and its completion marks a trend reversal to an uptrend.

In the standard C&H 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 the pattern.

Why Buy Mahindra & Mahindra (M&M)?

M&M is trading above strong resistance line standing around 540 levels indicating strong bullish bias to continue further. The recent formation of C&H pattern has given a breakout by trading above 540 marks which suggest buying in the stock for higher targets of Rs 575. Volume can also add further insight while trading these patterns. Decent volume participation while giving breakout is also giving support to C&H pattern.

Buy Signal:

1. Recent close prices (RS 546) are trading above the neckline (RS 540) of C&H pattern indicating trend reversal to an uptrend.

2. Short- term moving average 20 DMA (Rs 528) defines short-term trend is providing support to buyers as prices are sustained and trading above it.

3. The mid-term moving average 50 DMA (Rs 540) defines mid-term trend is very well augur with bulls as prices are sustained and trading above it.

4. Decent volume participation while pattern breakout is also giving additional confirmation.

Profit Booking:

Target as per C&H pattern is calculated by adding the height of Cup to the neckline which comes to Rs 575, however one can book profits near previous swing high which is around Rs 570.

Stop Loss:

Entire bullish view negates on breaching of Handle on a closing basis and one should exit from a long position. In the case of M&M, it is placed around Rs 520 levels.

Conclusion:

We recommend buying M&M around Rs 542 and lower towards Rs 540 levels with a stop loss of Rs 520 for higher targets of Rs 575 as indicated in the above chart.

The author is Head of Technical Research at Narnolia Financial Advisors.

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