4 minute read

Some may know me as passionate about the stock market. I follow stocks the way some of my friends follow sports. I liken my approach as similar to how my friends participate in fantasy football. They weed out weakness and add strength, precisely how one would manage a sound stock portfolio regardless of timeframe.

Yesterday, I asked ChatGPT to describe a “cup with handle”, a well-known concept in growth-style investing. Here’s what it gave me:

A cup with handle is a bullish chart pattern commonly used in technical analysis of stock price movements. It is named for its shape, which resembles a cup with a handle attached to it. The pattern typically forms after a prolonged downtrend and is considered a bullish continuation pattern.

Here are the key characteristics of a cup with handle pattern:

  1. Cup Formation: The pattern starts with a downward price movement, forming a rounded bottom that resembles a cup. The bottom of the cup should be relatively smooth and U-shaped, without significant spikes or sharp drops.

  2. Cup Depth: The depth of the cup is important. Ideally, the cup should be shallow, with a gradual decline and a moderate duration. If the cup is too deep or too shallow, it may not be a reliable pattern.

  3. Handle Formation: Following the cup formation, there is typically a small downward consolidation in the price known as the handle. The handle is formed when the price retraces slightly from the cup’s highs, creating a smaller downward-sloping channel.

  4. Handle Length: The handle should be relatively short compared to the cup formation, ideally lasting no more than one-third of the cup’s length. A handle that is too long or too short can weaken the pattern’s reliability.

  5. Volume: The volume tends to follow a specific pattern in a cup with handle formation. During the cup formation, the trading volume generally decreases. As the price starts to rise in the handle formation, the volume should be lower. However, as the stock breaks out of the handle, there should be a noticeable increase in volume, indicating renewed buying interest.

  6. Breakout: The pattern is considered complete when the stock price breaks out above the handle’s resistance level, signaling a potential bullish move. Traders often look for a significant increase in volume accompanying the breakout for confirmation.

Traders and investors use the cup with handle pattern to identify potential buying opportunities. They interpret the pattern as a sign of a stock’s consolidation and subsequent continuation of an upward trend. However, it’s important to note that patterns in financial markets are not foolproof and should always be considered alongside other indicators and analysis techniques before making investment decisions.

I find this pretty cool. If I need a refresher on a technical concept with a lot of particulars, using AI seems like quite a timesaver. However, it comes with a particular amount of risk in that you have to know what kind of information you need, and you need to be able to discern its accuracy.

Case in point: I asked about a Power Trend in the market, which is a particular time in a new market uptrend to get aggressive with position sizing and overall exposure. ChatGPT gave me a generic answer about the slop of a trend (up or down):

A power trend, also known as a strong or steep trend, in the stock market refers to a significant and sustained movement in the price of a stock or the overall market that shows a steep upward or downward trajectory. It is characterized by a rapid and strong price change over a relatively short period.

So I asked if an IBD-style Power Trend was any different and got this reply:

Yes, the term “Power Trend” is also used in the context of Investor’s Business Daily (IBD) and their proprietary investing methodology. In IBD’s approach, a Power Trend refers to a specific phase within their CAN SLIM investing system, which is designed to identify leading stocks with strong growth potential.

In IBD’s Power Trend, the focus is primarily on the overall market direction rather than individual stocks. It is a concept related to market timing and gauging the strength of the market’s uptrend. IBD’s Power Trend helps investors determine whether it is a favorable time to be actively buying stocks or if it is a more prudent time to be cautious and potentially reduce exposure to the market.

Justin Nielsen and Mike Webster of IBD identified the Power Trend concept and have rules for when it starts and ends. You can read more about it here. I asked ChatGPT to tell me when it starts and ends, and I got more information about general market uptrends. It didn’t seem able to give me the technical rules for identifying one.

I do think AI tools like ChatGPT can help us shorten our learning curves and accelerate our productivity. Today, however, it often takes enough working knowledge of a subject to make an informed evaluation about the information they provide.