Cup and handle patterns were first identified by William J O'Neil in his book How To Make Money In Stocks. The cup and handle is a longer termcontinuation pattern, normally observed on weekly charts.
The cup and handle forms as an intermediate/secondary cycle correction before the primary cycle resumes its up-trend. The pattern is a form of (ascending) triangle.
The cup pattern should take a minimum of 7 weeks to form. There is no upperlimit with some patterns taking as long as a year. The handle may form over oneor two weeks but may also take several months.
Example
Newcrest Mining Limited (Australia) exhibits 2 cup and handle patterns over1998/1999.
The cup commences with a new peak [1], formed after a strong up-trend.
A secondary correction occurs, with price falling +/- 50% from the peak at [1]. This is high - cup and handle corrections normally vary between 10% and 30%.
The stock then forms a second peak at [3], slightly lower than the first.
The handle is completed [4] when price breaks above the intervening peak [3]. The handle should form in the top half of the cup pattern, with volume contracting as the trough forms and then expanding on the breakout.
A smaller cup and handle pattern follows with the cup completed at [5] and the handle completed by the subsequent breakout above $4.00. Again, observe how volume contracts as the handle forms and then rises sharply at the breakout.
Patterns to avoid:
"Cups" with a sharp "V" bottom. The more "U" shaped the cup bottom is, the stronger the signal.
Handles which are too deep. The handle should form in the top half of the cup pattern.
Volume Confirmation
Volume should contract as the handle forms and then expand on the breakout.
Trading Signals
Go long at the breakout from the handle pattern with a stop below the mostrecent low in the handle pattern.
Example
United Energy Limited (Australia) shows a cup and handle pattern.
Start of the cup pattern.
The intervening peak completes the "cup" and starts the "handle".
Go long at the breakout [3] above the high of [2].
Place a stop-loss below the most recent low in the handle pattern.
Author: Colin Twiggs is a former investment banker with over 30 years experience in financial markets. He co-founded Incredible Charts and writes the popular Trading Diary newsletter.
Colin also writes The Patient Investor newsletter which focuses on the global economic outlook and key macro trends.
In addition, he founded PVT Capital (AFSL No. 546090) which offers investment strategy and advice to wholesale clients.
Two decades of trading analysis reveal that the cup and handle pattern boasts a 95% success rate during bullish markets, yielding an average profit of +54%. Although reliable and precise, this chart formation can be tricky to identify.
A strong Cup and Handle pattern is confirmed by a significant increase in volume as the price breaks above the resistance level formed by the cup's rim. This surge in volume indicates that buying interest has returned with force, and the breakout is likely to be sustained.
The cup and handle is a longer term continuation pattern, normally observed on weekly charts. The cup and handle forms as an intermediate/secondary cycle correction before the primary cycle resumes its up-trend. The pattern is a form of (ascending) triangle. The cup pattern should take a minimum of 7 weeks to form.
A cup and handle pattern failure, also known as a “failed cup and handle pattern”, is when a cup and handle pattern has formed, prices rise and move a little higher above the resistance level of the pattern.
Sometimes a shallower cup can be a signal, while other times a deep cup can produce a false signal. Sometimes the cup forms without the characteristic handle. Finally, one limitation shared across many technical patterns is that it can be unreliable in illiquid stocks.
Traders should be aware of the following considerations: False Signals:Like any technical pattern, false signals can occur. It is essential to use additional indicators or confirmatory signals to validate the pattern before entering a trade.
In a trending market, the price can remain above a Moving Average for a long period of time. Now, A cup and handle invalidation would be if you see a large sell-off from Resistance, as it tells you the market is not ready to head higher.
What does a cup and handle pattern say? A cup and handle is a technical signal that shows a security's price movement resembling a "cup" followed by an inverted pattern. This dip, or "handle," is intended to signify a good time to purchase and go long on an asset.
Once a cup and handle pattern forms, in order to generate a bullish trade signal, the price must break above the top of the handle that has formed. A drop below the handle is not necessarily bearish. The price may drop slightly, then rally back up, forming another handle or breaking above the initial handle.
The trading range should be a minimum of 7 weeks to form the pattern (including the handle) The pattern forming above the 200-day moving average. Base depth between 12-35% A downward-sloping handle that ideally forms no more than 15% below the left high of the cup.
To avoid false signals, traders should wait for a confirmed breakout above the handle's resistance level with increased volume before entering a trade. This helps ensure the pattern's validity.
Most traders use the distance between the resistance line and the cup's bottom to draft their profit target from the opportunity. So, if your market falls 100 points from the top to the bottom of the cup, you can set your profit target 100 points above the resistance line.
Once a cup and handle pattern forms, in order to generate a bullish trade signal, the price must break above the top of the handle that has formed. A drop below the handle is not necessarily bearish. The price may drop slightly, then rally back up, forming another handle or breaking above the initial handle.
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Introduction: My name is Cheryll Lueilwitz, I am a sparkling, clean, super, lucky, joyous, outstanding, lucky person who loves writing and wants to share my knowledge and understanding with you.
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