Friday, September 07, 2007

Faulty Base Pattern: Synchronoss Tech (SNCR)

Sometimes it can be easy to forget about the time component of basing patterns. A good example was the sharp pullback of SNCR last month. Naively, one might assume that because the price pattern of SNCR resembled a cup with handle, its basing pattern must also be considered a cup with handle. In reality, however, SNCR met none of the strict criteria defined by William O'Neil, most notably of which was that its basing time frame was much too short.

While I understand that many people seem to have many different definitions of the cup with handle, if we are to use the definition of the pattern's discoverer, William O'Neil, there can be little argument about whether or not SNCR was actually forming a cup with handle. Here are some of the cup with handle requirements from O'Neil's "How to Make Money in Stocks".

1. The cup pattern can be as long as 65 weeks, but must be a minimum of 7 weeks.
In the weekly chart (shown above), SNCR has only a 3 week cup formation.

2. The bottom of the cup should be rounded and give the appearance of a "U" rather than a very narrow "V". The reason given is that "this characteristic allows the stock time to proceed through a needed natural correction with two or three final little weak spells around the lows of the cup. The "U" area is important because it scares out or wears out the remaining weak holders and takes other speculators' attention away from the stock." I think it is pretty obvious that SNCR is more V-like than U-like.

3. Volume should dry up at the lows of the pattern. The lowest point of the V pattern in the daily chart of SNCR corresponds to the highest volume spike of the entire pattern, so the criterion fails as well.

I have been watching SNCR myself, but given that the recovery was much too quick, I have been waiting for another pullback to retest the lows on lighter volume. Such price action would undoubtedly form a double-bottom formation, which is another excellent basing pattern.

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