After doubling over a three-year period from mid-2012 to mid-2015, Cheesecake Factory Inc (NASDAQ: CAKE) stock has floundered in the past year or so. In fact, after hitting a new all-time high of $58.15 in August, the stock is down more than 10% in roughly eight months since.
Fortunately for Cheesecake Factory bulls, the stock has spent the last several months producing one of the most bullish classic technical chart formations.
A cup and handle pattern is formed when a stock takes a pause to consolidate during a long-term uptrend before ultimately resuming the uptrend. First, the slow, rounded price dip and recovery firms the “cup” part of the pattern. Then, a relatively brief and shallow dip or sideways trading period forms the “handle” before the stock rockets to new highs.
First take a look at what a textbook cup & handle pattern should look like:
Now take a look at how Cheesecake Factory has been trading since October:
The pattern seems to be very clear at this point, which is good news for patient Cheesecake Factory shareholders.
For now, the critical support level to watch is the $45 level that served as support for the bottom of the cup. There’s no hard rule about how deep the handle will dip or how long it will last before the potential breakout, so traders should keep a close eye on the chart. In the short-term, $50 has so far been the support level for the handle, but a breakdown below $50 doesn’t necessarily mean the cup & handle formation has been broken.
If the stock does break down below $45, the next potential support level could be the $41 level that served as support several times throughout 2014.
In terms of resistance, the first key level to watch is the $54-55 range that represents the stock’s 2016 high water mark and the top of the cup. A breakout above this level would also eliminate the possibility that the chart is forming a bearish head & shoulders pattern, with the February 2015 peak at $53.92 and the March 2016 peak at the exact same level serving as the right and left shoulders.
Above the $54-55 level, the stocks all-time high of $58.15 is the last remaining roadblock before the blue skies of new all-time highs.
After a ho-hum eight months of trading for Cheesecake Factory, the stock could be on the verge of a bullish cup & handle breakout. The first indication of a big move higher might be a push above $55 sometime in the next few weeks.
Disclosure: the author has no position in the stocks mentioned.
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