After testing resistance on Wednesday and Thursday the NASDAQ Composite finally broke through on Friday to  set a new all-time high, on volume that was 50% above the 50 day average. Some of the volume was attributable to Friday being a "quadruple witching day".

Wednesday saw the most significant news of the week with the FOMC dropping the word "patient" from their statement. Contrary to expectations, the sky did not fall and stocks surged after the 2pm announcement as it was assumed a raise in interest rates was no longer imminent.

Our trend signal for the NASDAQ remains positive and is now joined by the signal for the DJI. The S&P 500 signal is still negative but could change on Monday.

No new features this week.
 

Moderate Handle Depth Gives Best Breakout Day Gain

In my February 28 newsletter (How to Find Cup and Handle breakouts with a 90% Chance of Success) I showed how cup and handle stocks that are close to their breakout price on the day before breakout have a high probability  of breakout.

This week, I looked at the influence of handle depth on the strength of the breakout day gain. We know from my Analysis of a Cup and Handle Chart Pattern article that it is desirable that the stock retreat after forming the pivot but the question arises as to how much retreat generates the most powerful breakouts. To answer this question, I looked at successful cup with handle breakouts since January, 2014. The results are shown in the chart below.

The chart shows a scatter plot of gain as a % of breakout price (pivot) against handle depth as a % of breakout price. Each dot is one observation.

Firstly, notice that the most successful breakouts are clustered around a handle depth of about -5%, but the  vast majority of them have a breakout day gain of less than 5%

Secondly, notice that at very shallow handle depths, the breakout day gain over breakout price is quite small. This is evident from the polynomial regression line which slopes down as handle depths approach zero.

Thirdly, the polynomial regression line shows peak gains at depths of around -12%. However, there are many fewer breakouts at that level so successful breakouts at that depth are rarer.

The optimum depth appears to be in the range -6% to -3%, with a high number of successful breakouts giving average breakout day gains of about 4%.

Conclusion

If we combine the results from February 28 and today we can conclude that the most desirable cup with handle stocks to buy on breakout are those whose price on the day before breakout is within 95% or better of the breakout price and whose cup depth was in the range -3% to -6%.