Loews' Cup-Without-Handle Base Started A 1,080% Run In 1967

Sometimes a stock will throw investors for a loop by rushing straight into new high ground without pausing to form a handle. Should investors be ready to step up and buy into this aggressive price action? While the cup with handle is one of the most common winning chart patterns, the related and more rare cup without handle is also worthy of study.

In general, the handle is an important part of a base, serving as a final shakeout and setting a lower, less obvious buy point. But there are enough examples of successful cup-without-handle breakouts to serve as a model for buying this setup.

Cups without handles tend to be more failure-prone because they have taken less time to digest gains from the stock's climb up the right side of the base. Yet they can still produce worthwhile gains. The entry point in a cup base is 10 cents above the high of the left side of the pattern.

A proper cup base should have many of the same positive characteristics as a cup with handle. Look for signs of strong institutional accumulation, such as weeks closing higher in above-average turnover and tight weekly closes.

Look for symmetry. Even though the stock doesn't shape a handle, the right side should still be roughly symmetrical to the left side. Bases that climb rapidly from the bottom to new highs in a compressed amount of time carry more risk.

In the late 1960s, Loews (NYSE:L) built a giant cup without a handle before going on a massive run. The company was a beneficiary of the "follow-on effect," which is when a major development in one industry later has a spillover effect on a related industry.

During this period, the airline industry experienced rapid growth and stock price appreciation due to the introduction of jet airplanes. A dramatic increase in air travel led to increased demand for hotels and a huge run for Loews stock, which was using its theater land to build hotels in cities.

Loews' cup base was carved out during the 1966 bear market, causing the pattern to be unusually deep and large. It corrected 47% over 45 weeks, reasonable in the context of the Dow Jones industrials' 27% swoon.

Volume surged in the week of the March 1967 breakout to the highest level in years, showing overwhelming demand at the entry point. The stock's relative strength line (not shown on the chart) was hitting new highs as the stock outperformed the market despite its deep correction.

The stock ran out of the gate quickly and triggered the eight-week hold rule by climbing more than 20% past a 39.10 buy point in three weeks.

Following the rule helped keep investors in the stock through a sharp 14% pullback (1) and recovery.

Thirteen months later, after an approximate 300% price gain, the stock broke out from a smaller, eight-week cup-without-handle base (not shown) and climbed even higher before topping.

For a current example, pull up a chart of IBD 50 stock Lannett (LCI).

The generic-drug maker broke out past a 59.54 cup-without-handle buy point on Feb. 17. Shares advanced just a touch below 20% from the buy point last week before pulling back.