Use this screening method to stay on top of hot stocks, see them setup, and have your orders placed for when they explode.

The Cup and Handle is a great trading pattern, as it is easy to spot, scan for, and we have definite criteria that we can look to find high-quality trades. See the Cup and Handle Swing Trading Strategy article and video for more on how to trade that pattern.

This article will also discuss scanning for the Contraction Continuation Pattern.

In this article, we are going to look focus on scanning. Scanning or screening is the actual work. This is what I do once a week to produce my watchlists. These watchlists are published weekly on the site.

My watchlists are the stocks that setting up cup and handle patterns, or another pattern which is relevant at the time (sometimes it’s trend channels).

To learn more about scanning to find explosive trades, and when to focus on each strategy, as well as everything else you need to know about swing trading, check out my Complete Method Stock Swing Trading Course.

The Stock Scanning Process

1. I typically do my scanning in the evening, after the stock market has closed. I may run a scan during the day if I’m going to be busy in the evening. I typically run a scan once a week, but it could be done daily, or a few times a month. It depends on how much time you have.
   
   
2. To start, I open up my scanners. I typically use StockRover, but have recently also started using ChartMill “trade ideas”. I save all my scans in the account so they are ready to go. I can alter a couple of criteria if I want, but usually, I can just start flipping through charts. Both these scanners are free and have additional functionality with a paid subscription.
   
   
3. If I have time, I go through the whole list. If I am limited on time, I will sort by 3-month or 1-year performance, or 52-week range (highest first, in all cases). I then either go a set number, or I allocate a certain number of minutes to finding stocks that meet the patterns.
   
   
4. By glancing through the stocks, I write down stocks that suit the strategy parameters. This is a quick process, meaning I only spend a few seconds or less looking at each stock.
   
   
5. Then, I do a more thorough analysis of the stocks I’ve written down. I pull up a full chart (I use TradingView), consider the reward:risk, whether the trend is strong, and how well it meets the parameters. I will also make sure earnings aren’t coming out within a few days.
   
   
6. Once I have assessed the stocks, many will get crossed off the list. I may be left with a few. I then compare them to each other, and to the type of setups that have been occurring lately. Are these good candidates? Or are better trade setups likely to occur soon? If it is a good setup, I place my orders (if it is ready to pop). If it is almost ready to pop, I keep it on a notepad in front of me and also add it to my chart windows that are always open on my computer. That way I can watch it every day to see if it sets up fully.

Stock Scanning Video on Finding Cup and Handle and Continuation Patterns

This video provides some examples of using these scanners, the process to go through.

The video also discussed continuation patterns, which are just like handles, but they occur in strong uptrends typically after a cup and handle breakout.

Basic StockRover Uptrend Scan

If we run a scan for stocks in strong uptrends, we can then look through that list for cup and handles and contraction continuation patterns.

You can adjust these criteria, but understand what they doing and why they are there. For example, if the S&P 500 just fell 40% from its high, not many stocks are going to be near a high (90% criteria). You could drop this parameter to 70%. Then, you will see stocks within 30% of their highs, which is better than the S&P which is down 40%.

The last equation “5 day return >-6 and <6” is optional. It is my attempt to isolate stocks currently in small consolidations and to narrow down the list. Unfortunately, it doens’t always capture the consolidations I want, and it still lets through lots of stocks that aren’t consolidating.

The scan above was from July 29, 2020. Below is a scan from March 17, 2021. The stock market continued to rally between these two dates, which is going to change the scanner a bit. Since the market has continued to rise, the parameters need to be increased to account for that, and to keep isolating the strongest stocks. Here’s what the scan looks like on March 17 2021 after a strong advance. The primary trade candidates I would be looking for at this time are contraction continuation patterns.

Notice how the performance criteria have all escalated. If most stocks (indexes) have done very well, we need to keep upping our parameters so we are only seeing the strongest of the strong. I also dropped the 5-day return parameters (wasn’t working as I had hoped). I allowed for a bit more wiggle room, changing the proximity to 52-week to 75%+. This is because when stocks have run up so far, moving 10% or 20% off their highs isn’t very much. That said, to thin down the list and see the stocks holding up near their highs, keep this parameter at 80% or higher.

ChartMill Scans for Technical Setups and Breakouts

Navigate to the Trade Ideas tab. The Technical Breakout Setups and Momentum Squeeze Play Setups are where you will likely find cup and handle and continuation patterns.

In addition to the default settings you may wish to add in:

• US Only stocks
• Price above 1 (changed from 20)
• 1-week performance between -8% and 10% (or pick levels you like) to find stocks potentially consolidating right now. Could also select a “Squeeze Play” under Indicators.
• Relative stregnth settings.

Stock Scanning Tips

If you have limited time, create your process around that. You can easily limit scanning, and the analysis, to about 20 minutes an evening. Scan through the top of the list—a certain number of stocks—or scan for 10 minutes. Then check the validity of those patterns and place any potential orders in the next 10 minutes.

Use your scanner as a proxy for how healthy the market is for that strategy. If the scanner produces lots of results, that means the market is quite strong. If there are few or no scan results, the market is weak.

For any strategy, position sizing is key. Know the proper amount of stock to buy—for the risk of the trade, your risk tolerance, and relative to your account capital—before placing a trade.

To learn more about scanning to find explosive trades, and when to focus on each strategy, as well as everything else you need to know about swing trading, check out my Complete Method Stock Swing Trading Course.

By Cory Mitchell, CMT

Disclaimer: Nothing in this article is personal investment advice, or advice to buy or sell anything. Trading is risky and can result in substantial losses, even more than deposited if using leverage.