Both the Cup & Handle & the Inverted Cup & Handle are powerful price patterns seen in all markets, instruments,
time frames, & price ranges. Depending on a trader’s style these patterns can offer numerous opportunities for trades with
good risk:reward parameters. One of my favorite patterns because of the clear message within the price action and
versatility for trades in multiple time frames for many formations. Both the Cup & Handle & the Inverted Cup &
Handle can be seen as either bull or bear trend continuation & as reversals.
Basically the Cup & Handle & the Inverted Cup & Handle pattern occurs when a shorter consolidation or shallow
correction period happens after a rounded, ‘saucer’, bottom or top (respectively) price pattern. This rounded bottom/top
may be seen as a reversal & or an indication of trend strength but it is the breakout of the handle (with confirmation) that
establishes price direction. Ultimately the final test for trend is breaking through either the Support or the Resistance
outlined by the cup itself & with price & volume both confirming the break.
Typically once traders feel comfortable with the essence or spirit of the Cup & Handle & the Inverted Cup & Handle
patterns they can be traded in all time frames & price ranges. Traders can increase risk:reward as well as create more
opportunities working both these patterns looking at several ‘views’ simultaneously.
Please note: a full video review of each pattern independently is offered on the website with a text
description and chart examples. This video is meant to be a supplemental review for these very
powerful patterns.
This video includes both the Cup & Handle & the Inverted Cup & Handle patterns & the objectives are:
1.
2.
3.
4.
a 'cliff notes' perspective of the Spirit of a Cup & Handle & the Inverted Cup & Handle
a review of numerous nuances for both patterns in different configurations
quick look at numerous NON- stock instruments - various time frames & price ranges
be creative identifying the patterns while maintaining the guidelines
Learning the volume patterns inside the structure of a Cup & Handle & the Inverted Cup & Handle is of the utmost
importance. These patterns represent a 'duel' between buyers & sellers and a fight for control of where price will go next.
For this reason I offer study materials in different versions. Please also see the charts offered on the website for these
patterns independently as a couple of them were part of this video review. Then as further study material I have also
offered the additional charts used for this review of different instruments & time frames. The more exposure to the
concept with the different variations will help train a trader's mind to see these patterns.
The Cup & Handle & the Inverted Cup & Handle pattern Nuances chart examples:
The Cup & Handle is a powerful price pattern seen in all markets, instruments, time frames, & price ranges. The ‘classic’
interpretation is to see it form with a stock in a steady bullish trend and the Cup & Handle is an intermediate-term
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market correction. This bullish continuation definition also includes guidelines for the duration of the pattern to be
anywhere from 6 weeks at the shortest to more than a year during extended consolidation periods.
Basically the Cup & Handle pattern occurs when a shorter consolidation or shallow correction period happens after a
rounded, ‘saucer’, bottom price action pattern. This rounded bottom may be seen as a reversal & or an indication of trend
strength but it is the breakout of the handle (with confirmation) that establishes price direction. Classic technicians will
look for this pattern to breakout long to complete the bullish continuation. Often however; this pattern has taken enough
time to form, making it difficult to decide whether buyers or sellers are in control & price stalls…& then breaks out in either
direction. Volume is the key to confirm control of price & conviction for the instrument.
At first glance the guidelines for duration of the Cup & Handle pattern might deter a shorter time-frame trader. This
pattern can be challenging for several reasons but it can also be quite profitable & may offer numerous opportunities for
trades while in formation. Typically once traders feel comfortable with the essence or spirit of the Cup & Handle pattern
they can be traded in all time frames & price ranges. Traders can increase risk:reward as well as create more opportunities
working a Cup & Handle looking at several ‘views’ of the pattern simultaneously. With the advent of many more
instruments & time frames available to today’s traders, the Cup & Handle can be seen as a bullish or bearish trend
continuation pattern & it can also confirm a reversal of a ‘tired’ trend.
Visually the Cup & Handle price pattern is a 2 part structure & resembles a U-shaped tea cup with a handle attached on
the right. The sequence of events is important to note & again whether the interpretation is continuation or reverse the
pattern will present the same.
Sequence order for Cup & Handle
Background - ‘classic’ price action in a steady uptrend – also seen with price in a downtrend
1. Start with a left side ‘rim or lip’ representing price hitting an area that cannot be supported.
2. The reaction starts a breakdown of price with strong volume initially which creates a steep descent creating the
left side to the cup.
3. Eventually price ‘bottoms’ & consolidates with the best patterns forming a smooth, sideways, bowl-shaped
consolidation area representing the bottom of the cup. Traders are looking for signs of sellers being exhausted &
buyers continuing to support the area.
4. The right side of the cup starts once buyers take control & push price through the immediate resistance offered by
the consolidation period. The targeted effort is a re-test of the left rim resistance of the cup. The pattern is often
quite symmetrical & traders can use the left side of the cup price action as a guide for targeting as well as an
indication of the overall strength or weakness of the price action on this right side of the cup.
5. Right ‘rim or lip’ price may or may not be perfectly horizontal with the left rim & often occurs with some thrusting
action as the bulls’ effort gradually becomes exhausted creating this 2nd effort into resistance.
6. Again the price reaction into this Double Top effort on resistance is another re-tracement which subsequently
establishes a trading range to create the ‘handle’ for the cup.
2
Nuances for the Cup & Handle:
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3
Background price action into Left Rim:
o Bull trend - ideally should be established, steady & typically not the impulsive thrusting type of action seen
with a new breakout.
 If trend too mature then increases possibility of this trend being tired & may be a final thrust into a
reverse of trend.
o Bear trend – ideally an early push in trend & traders looking for this support effort to be a brief pause.
 Bears need to monitor each additional push & the decision to exit a Short trade will be early…ideally
the cup bottom consolidation stage
Cup:
o Rims – ideally relationship 1st – 2nd resistance efforts will offer the trader an advantage before the break.
 Solid double top price effort is a close 2nd choice set up.
o ‘U’ shaped – ideally price consolidation resembles a bowl or rounding bottom. Concept is the softer ‘U’ shape
is a consolidation with valid or true ‘support’.
 ‘V’ shaped – considered ‘too sharp’ by many to qualify
o Bull trend - ideally depth of the cup should retrace 1/3 or less of the previous trend advance but it often will
hit 50%. Extreme would be 2/3.
Right Rim:
o Price may or may not hit the same level as the left rim & it may even go thru that price.
o All Traders need to remember at this moment this re-test is a Double Top & the odds are it will respond to
stop the advance of price & generate a reverse.
o It may never create a handle.
Handle:
o Often the retrace off the right rim will pause long enough to form a pattern of it’s own. This pattern can
resemble any shape & appear ‘tilted’ in any direction but ideally price does not retrace more than 1/3 of the
cup’s advance. Concept is the smaller the retrace the more bullish the formation & significant the breakout.
o 2nd line 50%
o Retrace back to cup bottom consolidation breakout price point & hold represents the deepest retrace.
o It is not unlikely & perhaps even common for 2 or more handles to form. Volume is the Key.
Symmetry:
o Often this pattern presents a very symmetrical picture. Rim to rim – side to side – and often a fairly sideways
rectangular bottom consolidation.
o It is also common for cups to form within cups as the pattern continues to use its own background.
o Traders can work the symmetry of this pattern to their advantage with focus.
o Ideally the proportional duration of the cup formation is 2/3 & the handle formation 1/3 - or less
o Definition of support can be advanced from the cup bottom to the Handle lows using trendlines for focus
Volume: overall tends to mirror or parallel the price pattern
o Left side of cup – sellers firmly in control – traders look for possible support while monitoring the exhaustive
pushes in volume finally ending with a selling capitulation
o Bottom of cup – consolidation - ‘flushing out sellers’ while holding support
 establish the muddy trench – where are both buyers & sellers willing to accept price
 establish immediate resistance
 typically volume is below average
 traders waiting thru this period for signs of increased buying
o Right side of cup – buyers increase & push price & then hold trench & follow thru with a push thru the
immediate resistance with ideally some strength for continuing
Again often this is a symmetrical advance in price & the volume pattern in-line with the left side
descent
o Right Rim - ideally can see buyers exhaust with thrusting action into target or higher
o Handle – ideally an advantage can be seen through price response from both buyers & sellers on handle
pattern S & R – often volume decreases as more traders are uncertain of direction.
o Breakout – ideally surge in volume with breakout & confirmation offered with conviction for chosen price
trend direction. Regardless of time frame this volume surge needs to stand out as ‘significantly above
average.’
o Price advancing on weak buying volume is a red flag that perhaps the basing is not over yet & more time &
sluggish price action may be needed before a breakout can truly advance.
o Often this pattern offers more than 1 handle & a lack of volume support is the reason for failed breakouts.
Targets based on full completion of pattern & entry with Handle break:
o Long-Measured move (bottom of cup – right peak) added to breakout of Handle
o Long-Measured move (bottom of cup – handle breakout) added to breakout of Right Rim
o Short-Measured move (bottom of cup – handle breakdown) subtracted from breakdown of Handle
o Short-Measured move (bottom of cup – right peak) subtracted from breakdown of Handle
o Note the short scenarios would require close monitoring as price moves back down through the consolidation
area of the cup bottom. Any further move will require that support base to break creating confirmation for a
bear trend.
Additional potential Targets based on trader style:
o Short entry with left rim rejection
o Long &/or short entries once establish consolidation immediate S&R with muddy trench- thrust action helps
o Long entry once muddy trench holds – indication buyers in control - target double top effort
o Long entry once the consolidation immediate resistance breaks – buyers push price – target double top effort
o Short entry Double Top resistance – potential reversal & not a C&H at all…
o Long &/or short entries once establish immediate S&R of Handle pattern
Stop Limit placement should work recognizing price action history of all components of cup
o An example: breakout long of rim resistance – stop placement could be directly under Right rim
o An example: entry long in handle pattern – stop placement could be directly under the Handle low
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While this pattern is fairly straightforward it should be noted that traders often ‘jump the gun’. False breakouts do happen
& confirmation needed is always a traders’ choice. The trend is in force until proven otherwise. Formations can take some
time and often it takes a break of a more significant support/resistance before a major move. Patience is often a virtue. If a
trader will give the pattern time to develop and look for the proper clues & then follow the guidelines, this chart pattern
can be well-worth the effort of identifying & trading it.
The aggressive trading methods can highly increase the profit potential of any Cup & Handle & may offer more than
one entry. However, the trader needs to assess whether the ‘extra’ profits choosing an earlier entry offers a decent
risk:reward over waiting for some confirmation of action based on clearing a defined price level. It cannot be stressed
enough that volume is a major key & an expansion of volume aids confirmation.
Cup & Handle Pattern chart examples are usually only offered for stocks with long durations & typically only in a
bullish trend continuation representation. For this reason I have chosen not to use stocks but to offer a mix of
instruments, time frames, & price ranges in order to represent the nuances seen in the Cup & Handle Patterns.
Hopefully traders can identify them more often and learn how to trade them for the great potential they offer.
4
The Inverted Cup & Handle is a powerful price pattern seen in all markets, instruments, time frames, & price ranges.
The ‘classic’ interpretation is to see it form with a stock in a steady bearish trend and the Inverted Cup & Handle is an
intermediate-term market correction. This bearish continuation definition also includes guidelines for the duration of the
pattern to be anywhere from 6 weeks at the shortest to more than a year during extended consolidation periods.
Basically the Inverted Cup & Handle pattern occurs when a shorter consolidation or shallow correction period
happens after a rounded, ‘saucer’, topping price action pattern. This rounded top may be seen as a reversal & or an
indication of trend strength but it is the breakout of the handle (with confirmation) that establishes price direction.
Classic technicians will look for this pattern to breakout short to complete the bearish continuation. Often however; this
pattern has taken enough time to form, making it difficult to decide whether buyers or sellers are in control &
price stalls…& then breaks out in either direction. Volume is the key to confirm control of price & conviction for the
instrument.
At first glance the guidelines for duration of the Inverted Cup & Handle pattern might deter a shorter time-frame
trader. This pattern can be challenging for several reasons but it can also be quite profitable & may offer numerous
opportunities for trades while in formation. Typically once traders feel comfortable with the essence or spirit of
the Inverted Cup & Handle pattern they can be traded in all time frames & price ranges. Traders can increase
risk:reward as well as create more opportunities working an Inverted Cup & Handle looking at several ‘views’ of the
pattern simultaneously. With the advent of many more instruments & time frames available to today’s traders,
the Inverted Cup & Handle can be seen as a bullish or bearish trend continuation pattern & it can also
confirm a reversal of a ‘tired’ trend.
Visually the Inverted Cup & Handle price pattern is a 2 part structure & resembles an upside-down U-shaped tea cup
with a handle attached on the right. The sequence of events is important to note & again whether the interpretation is
continuation or reverse the pattern will present the same.
Sequence order for Inverted Cup & Handle:
Background - ‘classic’ price action in a steady downtrend – also seen with price in an uptrend
1. Start with a left side ‘rim or lip’ representing price hitting an area that is supported.
2. The reaction starts a breakout of price with strong volume initially which creates a steep ascent creating the left
side to the cup.
3. Eventually price ‘tops’ & consolidates with the best patterns forming a smooth, sideways, upside-down bowlshaped consolidation area representing the top of the inverted cup. Traders are looking for signs of buyers being
exhausted & price cannot make it through the resistance area.
4. The right side of the cup starts once sellers take control & push price through the immediate support offered by
the consolidation period. The targeted effort is a re-test of the left rim support of the cup. The pattern is often
quite symmetrical & traders can use the left side of the cup price action as a guide for targeting as well as an
indication of the overall strength or weakness of the price action on this right side of the cup.
5
5.
Right ‘rim or lip’ price may or may not be perfectly horizontal with the left rim & often occurs with some thrusting
action as the bears’ effort gradually becomes exhausted creating this 2nd effort into support.
6. Again the price reaction into this Double Bottom effort on support is another re-tracement which subsequently
establishes a trading range to create the ‘handle’ for the inverted cup.
Nuances for the Inverted Cup & Handle:

Background price action into Left Rim:
o Bear trend - ideally should be established, steady & typically not the impulsive thrusting type of action
seen with a new breakout.
 If trend too mature then increases possibility of this trend being tired & may be a final thrust into
a reverse of trend.
o Bull trend – ideally an early push in trend & traders looking for this support effort to be a brief pause.
 Bulls need to monitor each additional push & the decision to exit a Long trade will be
early…ideally the cup top consolidation stage.

Cup:
o
o
o
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Rims – ideally relationship 1st – 2nd support efforts will offer the trader an advantage before the break.
 Solid double bottom price effort is a close 2nd choice set up.
Inverted ‘U’ shaped – ideally price consolidation resembles a bowl or rounding top. Concept is the softer
inverted ‘U’ shape is a consolidation with valid or true ‘resistance’.
 Inverted ‘V’ shaped – considered ‘too sharp’ by many to qualify
Bear trend - ideally depth of the cup should retrace 1/3 or less of the previous trend decline but it often
will hit 50%. Extreme would be 2/3.

Right Rim:
o Price may or may not hit the same level as the left rim & it may even go thru that price.
o All Traders need to remember at this moment this re-test is a Double Bottom & the odds are it will
respond to stop the decline of price & generate a reverse to some degree.
o It may never create a handle.

Handle:
o Often the retrace off the right rim will pause long enough to form a pattern of it’s own. This pattern can
resemble any shape & appear ‘tilted’ in any direction but ideally price does not retrace more than 1/3 of
the cup’s decline. Concept is the smaller the retrace the more bearish the formation & significant the
breakdown.
o 2nd line 50%
o Retrace back to cup top consolidation breakdown price point & hold represents the deepest retrace.
o It is not unlikely & perhaps even common for 2 or more handles to form. Volume is the Key.

Symmetry:
o Often this pattern presents a very symmetrical picture. Rim to rim – side to side – and often a fairly
sideways rectangular top consolidation.
o It is also common for cups to form within cups as the pattern continues to use its own background.
o Traders can work the symmetry of this pattern to their advantage with focus.
o Ideally the proportional duration of the inverted cup formation is 2/3 & the handle formation 1/3 - or
less
o Definition of resistance lowered from the inverted cup top to the Handle tops using trendlines for focus
7

Volume: overall tends to mirror or parallel the price pattern
o Left side of cup – buyers firmly in control – traders look for possible resistance while monitoring the
exhaustive pushes or thrusts in volume finally ending with topping capitulation
o Top of inverted cup – consolidation - ‘flushing out buyers’ while holding resistance
 establish the muddy trench – where are both buyers & sellers willing to accept price
 establish immediate support
 typically volume is below average
 traders waiting thru this period for signs of no more buying & then also an increase of sellers
o Right side of cup – sellers increase & push price & then hold under the muddy trench
 follow thru with a push thru the immediate support with ideally some strength
 often symmetrical decline in price & the volume pattern in-line with the left side ascent
o Right Rim - ideally can see sellers capitulate into targeted support or lower
o Handle – ideally an advantage can be seen through price response from both buyers & sellers on handle
pattern Support & Resistance
 often volume decreases inside pattern as more traders are uncertain of direction
 squeeze and still need confirmation of BreakOut
o Breakout – ideally surge in volume with breakout & confirmation offered with conviction for chosen price
trend direction.
 Regardless of time frame this volume surge needs to stand out as ‘significantly above average.’
 price declining on weak selling volume is a red flag that perhaps the basing is not over yet & more
time & sluggish price action may be needed before a breakout can truly occur.
o Often this pattern offers more than 1 handle & a lack of volume support is the reason for failed
breakdowns.

Targets based on completion of Inverted Cup & Handle pattern & entry with Handle break or
later:
o Short- Measured move (top of inverted cup – right peak) subtracted from breakdown of Handle
o Short- Measured move (top of inverted cup – handle breakout) subtracted from breakdown of Right
Rim
o Long- Measured move (top of inverted cup – handle breakout) added to breakout of Handle
o Long-Measured move (top of inverted cup – right peak) added to breakout of Handle
o Note the long scenarios would require close monitoring as price moves back up through the consolidation
area of the inverted cup top. Any further move will require that resistance area to break creating
confirmation for a bull trend.

Additional Opportunities based on trader style:
o Long entry with left rim support
o Long &/or short entries once establish consolidation immediate S&R with muddy trench- thrust action
helps
o Short entry once under muddy trench – indication no buyers & sellers in control - target double bottom
effort
o Short entry once the consolidation immediate support breaks – sellers push price – target double bottom
effort
o Long entry Double Bottom support bounce – potential reversal & not a C&H at all…
o Long &/or short entries once establish immediate S&R of Handle pattern
o Retraces - multiple handles are common until a larger price level is broken & a trend confirms.
o 'Cups inside of cups' working symmetry &/or multiple timeframes simultaneously

Stop Limit placement work recognizing price action history of all components of cup
o example: breakdown short of right rim support – stop placement directly above right rim
o example: entry short in handle pattern – stop placement directly above Handle high
While this pattern is fairly straightforward it should be noted that traders often ‘jump the gun’. False breakouts do happen
& confirmation needed is always a traders’ choice. The trend is in force until proven otherwise. Formations can take some
time and often it takes a break of a more significant support/resistance before a major move. Patience is often a virtue. If a
trader will give the pattern time to develop and look for the proper clues & then follow the guidelines, this chart pattern
can be well-worth the effort of identifying & trading it.
The aggressive trading methods can highly increase the profit potential of any Inverted Cup & Handle & may offer
more than one entry. However, the trader needs to assess whether the ‘extra’ profits choosing an earlier entry offers a
decent risk:reward over waiting for some confirmation of action based on clearing a defined price level. It cannot be
stressed enough that volume is a major key & an expansion of volume aids confirmation.
Inverted Cup & Handle Pattern chart examples are usually only offered for stocks with long durations & typically only
in a bearish trend continuation representation. For this reason I have chosen not to use stocks but to offer a mix of
instruments, time frames, & price ranges with various backgrounds leading into the pattern in order to represent the
nuances seen in the Inverted Cup & Handle Patterns. Traders willing to trade the essence of what the pattern
represents will find it very versatile in trading opportunities. In addition to the material in this post see the extra
video 'Cup & Handle Nuances' in order to review numerous additional charts where we mix all views & include our
inverted version of this pattern. Hopefully traders will be able to identify these patterns more often and learn how to trade
their 'spirit' for the great potential they offer.
Inverted Cup & Handle Pattern chart examples:
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Several slides full of chart examples in PowerPoint Inverted Cup & Handle
http://www.fxkeys.com/cup-and-handle-pattern-in-forex-market/
Cup and and Handle or Saucer and Handle pattern is one of the strongest patterns I have ever seen.
This pattern doesn’t form on the charts too often, because unlike the other patterns
like triangles, head and shoulders, rectangles and… it needs a long time to form. However, when
formed it is so reliable and strong and generates strong and profitable trade setups. He also says
same exact deal for inverted Inverted Cup & Handle.
This patterns looks exactly as it is named. It looks like a cup and its handle when you look at it from
the side.
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1. A to B: Cup and handle pattern starts forming when the market starts going down strongly. The
down movement forms the left side of the cup.
2. B to C: After a while of having a strong bearish market, bears becomes exhausted and so the
down movement becomes slower, and we will have a sideways market for a short period of time. This
sideways movement forms the bottom of the cup.
3. C to D: Then the bulls take the control and the market starts going up strongly, like when it started
going down strongly at the beginning of the formation of the cup. This strong up movement forms the
right side of the cup.
4. D to E: After a while of going up, the bulls become exhausted too and so the market stops going
up strongly and forms a small sideways section which is the cup handle. This part is very important
because it is where we can predict the next direction of the market. I will tell you how.
How Can You Use the Cup and Handle Pattern in Your Trading?
This is a good question. We learn the chart patterns to become able to use them for locating the trade
setups, otherwise there is no point to learn to recognize the chart patterns.
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1. Going Long at the Bottom of Cup and Handle Pattern:
When the markets starts going down strongly and then becomes slow and forms a sideways market
that has a tendency to go up, experienced traders understand that the market is at the middle of
forming a cup and handle pattern.
When the market is going down strongly to form the left side of the pattern, you can not do anything
unless you are already short because you had the chance to take a short position after a support
breakout. However, you have to wait if you are not already short. If the market becomes sideways
and shows a tendency to go up by forming bigger and bigger bullish candles, then you know that the
market is at the middle of forming a cup and handle pattern. At this stage, the left side of the cup and
also most part of its bottom part is already formed, and you know that soon you will see a strong up
movement which will form the right side of the cup. Therefore, you can wait for a resistance breakout
to go long. I am using the above example (screenshot) to show you how and where you could go long
when the market was completing the formation of the bottom of the cup:
2. Going Long/Short After the Handle Breakout:
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There is a well-known rule about the handle which says, if the price breaks above the handle
resistance, it will keep on going up strongly. This up movement can be at least the same as the size
of the cup depth. If you succeed to go long at the bottom of the cup, then you should close your
position and collect your profit when you see that the market becomes slow again and bigger
bearish candles start appearing. This is the beginning of the formation of the handle (D to E).
You wait for the handle to develop. It will have a resistance and probably a support. Sometimes the
handle forms inside a triangle which makes it much easier to wait for the trade setup.
In the below example, the price did not break above the handle resistance. Instead, it broke below a
support line that formed after the handle formation and went down strongly. Therefore, we could go
short. If it had broken above the handle resistance, then we could have gone long:
Now I show you an example where the price breaks above the handle resistance and goes up
strongly. This is something that is more expected when a cup and handle forms on the chart. In most
cases bulls will take the control after the formation of the handle and the price will go up after the
handle resistance breakout.
The below screenshot shows another cup and handle pattern that formed on EUR/USD daily chart
after the above cup and handle that I already showed you. The above pattern broke below the
support and went down. However, the below pattern broke above the handle resistance and went up.
Another thing about the below example is that the handle formed inside a symmetrical triangle that
made it easier to wait for the breakout, because we already knew that in an uptrend it was more
probable that the market breaks above the resistance of the formed symmetrical triangle (which in
this case is the handle resistance also) and continues the uptrend:
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Now the question is how far the market would go after the handle resistance breakout?
To answer this question, you have to plot a horizontal line above the handle highest level. The
distance of this line from the bottom of the cup is the size of the up movement that will occur after the
handle resistance breakout.
Please look at the below screenshot. I have plotted a horizontal line above the handle highest high
(the dashed red line). Then another horizontal line below the lowest low of the cup. The distance of
these two lines is 914 pips. If we had gone long after the handle resistance breakout, we expected
that the market would go up for 914 pips. To prove if it would or not, I plotted another horizontal line
914 pips above the horizontal line I plotted above the handle highest high. As you see on the below
screenshot, the market did went up exactly for 914 pips and then reversed and went down. It is
amazing, isn’t it?
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http://www.trending123.com/patterns/cup_and_handle.html
Cups with Handles are similar in appearance to Rounded Bottoms. Like rounded bottoms, the
pattern includes an elongated U-shape. However, the pattern also includes a short period of
consolidation of 1-2 weeks in duration, which tends to be downtrending. The pattern is similar in
appearance to a coffee cup with a right-side handle, and indicates the potential for an uptrend.
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The cup always precedes the handle. As the cup develops, the price pattern follows a gradual bowl
shape. There should be an obvious bottom to the bowl; a v-shaped turn is not a good indicator.
The depth of the cup indicates the potential for a handle and subsequent breakout to develop. The
cup should be fairly shallow.
The handle tends to be down sloping, and indicates a period of consolidation. Consolidation occurs
when the price seems to bounce between an upper and lower price limit. You can track the down
sloping angle of the handle by drawing trendlines across the upper and lower price limits. If the price
ascends outside of the trendlines, then it has the potential for breakout. If the price ascends beyond
the upper, right side of the cup, then the pattern is confirmed, particularly if it is accompanied with a
sharp increase in volume.
Volume
Volume tends to parallel the price pattern. Consequently, during the cup formation, as price
descends, volume tends to decrease. Following a period of relative inactivity (at the bottom of the
cup), the price pattern starts an upward turn and volume tends to increase.
During the handle formation, the volume decreases. However, you will notice an increase in volume
when the price breaks out beyond the right side of the cup.
Duration of the Cup and Handle
Rounded Bottoms are long-term patterns. Martin J. Pring identifies that the pattern can occur over a
period of about 3 weeks, but can also be observed over several years.
Duration of the Pattern
Like Rounded Bottoms, the Cup with Handle is a long-term pattern. According to O'Neil, the cup
duration is between 7 to 65 weeks. According to Gregory Khun, the cup "is usually three to six
months in duration but can be as long as 12 months during bear markets or as short as seven weeks
during bull markets." The handle usually develops in 1-2 weeks.
Target Price
Understandably, investors like to buy at the lowest possible price. Ideally, investors would buy at the
bottom of the cup formation. However, by the time the handle formation begins to develop, investors
must gauge their level of risk. There is no surefire way to predict when the lowest point will occur, and
there is a possibility that the pattern will fail, and breakout in a downtrend.
Some technical analysts believe that the best time to buy is after the handle begins to ascend.
According to Rick Martinelli and Barry Hyman, O'Neil "recommends buying stocks only as they break
out of the cup-with-handle to new highs". Khun suggests a more aggressive method of buying stocks.
He suggests that "experienced traders can buy in increments in anticipation of a breakout, but it's
tricky."
The handle will often slope downwards initially, however, watch for the price to breakout beyond the
price at the right side of the cup. The depth of the cup from the right side is an indicator for the
potential price increase. However, Bulkowski notes, "Many cups fail after rising only 10% to 15%. Be
sure to use stop-loss orders to limit losses or to maximize gains".
15
Criteria that supports - Volume tends to parallel the price formation. During the handle formation,
watch for the price and volume to increase. An increase in volume is an indication that the pattern has
potential to continue the uptrend, and ascend beyond the right side of the cup.
Criteria that Refutes
V-shape
There are v-shaped patterns that yield successful returns, however, during the cup formation, watch
for a rounded shape because the rounded shape provides a more reliable and predictable formation.
Down sloping handles
The handle will tend to be down sloping, however the following criteria indicate a potential failure:
•
the handle should not drop below the top half of the cup formation
•
the price should not drop below the 200 day Moving Average
http://stockcharts.com/school/doku.php?id=chart_school:chart_analysis:chart_patterns:cup_with_han
dle_cont
As with most chart patterns, it is more important to capture the essence of the pattern than the
particulars. The cup is a bowl-shaped consolidation and the handle is a short pullback followed by a
breakout with expanding volume. A cup retracement of 62% may not fit the pattern requirements, but
a particular stock's pattern may still capture the essence of the Cup with Handle.
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•
Trend: EMC established the bull trend by advancing from 10 and change to above 30 in
about 5 months. The stock peaked in March and then began to pull back and consolidate its
large gains.
•
Cup: The April decline was quite sharp, but the lows extended over a two month period to form
the bowl that marked a consolidation period. Also note that support was found from the Feb-99
lows.
•
Cup Depth: The low of the cup retraced 42% of the previous advance. After an advance in
June and July, the stock peaked at 32.69 to complete the cup (red arrow).
•
Handle: Another consolidation period began in July to start the handle formation. There was a
sharp decline in August that caused the handle to retrace more than 1/3 of the cup's advance
•
However, there was a quick recovery and the stock traded back up within the normal handle
boundaries within a week. I believe the essence of the formation remained valid after this
sharp decline.
•
Duration: The cup extended for about 3 months and the handle for about 1 1/2 months.
•
Volume: In early Sept-00, the stock broke handle resistance with a gap up and volume
expansion (green arrow). In addition, Chaikin Money Flow soared above +20%.
•
Target: The projected advance after breakout was estimated at 9 points from the breakout
around 32. EMC easily fulfilled this target over the next few months.
http://stockcharts.com/school/doku.php?id=chart_school:chart_analysis:chart_patterns:cup_with_han
dle_cont
Cup with Handle (Continuation)
The Cup with Handle is a bullish continuation pattern that marks a consolidation period followed by a
breakout. It was developed by William O'Neil and introduced in his 1988 book, How to Make Money in
Stocks.
As its name implies, there are two parts to the pattern: the cup and the handle. The cup forms after
an advance and looks like a bowl or rounding bottom. As the cup is completed, a trading range
develops on the right hand side and the handle is formed. A subsequent breakout from the handle's
trading range signals a continuation of the prior advance.
1. Trend: To qualify as a continuation pattern, a prior trend should exist. Ideally, the trend should
be a few months old and not too mature. The more mature the trend, the less chance that the
pattern marks a continuation or the less upside potential.
2. Cup: The cup should be "U" shaped and resemble a bowl or rounding bottom. A "V" shaped
bottom would be considered too sharp of a reversal to qualify. The softer "U" shape ensures
that the cup is a consolidation pattern with valid support at the bottom of the "U". The perfect
pattern would have equal highs on both sides of the cup, but this is not always the case.
3. Cup Depth: Ideally, the depth of the cup should retrace 1/3 or less of the previous advance.
However, with volatile markets and over-reactions, the retracement could range from 1/3 to
1/2. In extreme situations, the maximum retracement could be 2/3, which conforms with Dow
Theory.
4. Handle: After the high forms on the right side of the cup, there is a pullback that forms the
handle. Sometimes this handle resembles a flag or pennant that slopes downward, other times
it is just a short pullback. The handle represents the final consolidation/pullback before the big
breakout and can retrace up to 1/3 of the cup's advance, but usually not more. The smaller the
retracement, the more bullish the formation and significant the breakout. Sometimes it is
prudent to wait for a break above the resistance line established by the highs of the cup.
5. Duration: The cup can extend from 1 to 6 months, sometimes longer on weekly charts. The
handle can be from 1 week to many weeks and ideally completes within 1-4 weeks.
6. Volume: There should be a substantial increase in volume on the breakout above the handle's
resistance.
7. Target: The projected advance after breakout can be estimated by measuring the distance
from the right peak of the cup to the bottom of the cup.
18
http://www.leavittbrothers.com/education/chart_patterns/cup_and_handle_bullish.cfm
Inverted Cup & Handle patterns are powerful and reliable continuation patterns that form in uptrends
and therefore have bullish implications. Their completion signals the end of a consolidation period
and the continuation of its bullish uptrend.
The above chart illustrates the sequence of events that unfold as the pattern develops. After a nice
rally (preferably on solid volume), the stock begins a long drawn out correction. When the pullback
begins, many stockholders decide that after the nice rally, they now would like to take profits up near
the peak. There were also many late-to-the-party buyers who bought at the peak, and as the stock
starts to drop, these stockholders have one thing on their mind – to “get out even.” These two groups
will create selling pressure when the stock regains strength. Months later when the stock trades close
to the first peak, stockholders jump at the opportunity and start selling. Thus a second pullback
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begins. A line drawn through the two peaks forms a trendline. This second pullback is very healthy
and normal for a strong stock or a stock that is gaining strength. Since stock movements have such a
large psychological component to them, it is unlikely the stock will enjoy any type of rally as long as
there exists many disgruntled stockholders. It takes time to weed out these weak links. Once enough
time has passed (the formation of the handle), the stock is free to move higher for there is now an
absence of stockholders who will sell at the first good opportunity.
The trendline should be flat or slightly downward sloping. Inverted Cup & Handle patterns usually take
several months and sometimes over a year to form.
The best patterns possess a decent amount of symmetry with the right half of the cup mirroring the
left half and the right half of the handle mirroring the left half. But while it is nice for the pattern to have
a smooth even balance, it is not absolutely necessary. Also, it is important that the handle not go
below the midpoint of the cup. Theoretically, only the selling to satisfy the people who want to get out
near the previous high needs to take place. But if the stock drops below the midpoint of the cup, it is a
warning that more selling is taking place than simply a handful of panicky holders.
It is not unlikely, and perhaps common, for 2 handles to form, so anticipating the breakout and
entering a position early is not a good idea. This is healthy for the stock and is simply an indication
that a little more “work” is needed to allow the weak stockholders to get out.
The same breakout requirements govern as with other breakouts. Volume must surge to validate the
breakout, and appropriate stops shall be implemented if volume is not satisfactory.
There are two guidelines a trader can use to determine the expected price movement upon breakout.
The first is the equal to the depth of the cup. The second is the price movement into the first peak.
Often the strength or weakness of the overall market will dictate the success of the pattern.
GSIC rallied strongly from penny stock land and then formed a nice Inverted Cup & Handle pattern
with easily defined resistance. Notice the volume starting to pick up on the right side of the cup and
then drop off on the left side of the handle before surging during the breakout. That is textbook
action.
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HEPH also formed a Inverted Cup & Handle pattern while in a steady uptrend. The stock did pull back
to test the breakout area, and after succeeding it began a nice steady climb. It would have been nice
to get a big breakout from the get-go, but this isn't rocket science – patterns don't always work
perfectly. As long as the stock stays in its uptrend, there is no reason to exit the trade.
WMAR is another decent Inverted Cup & Handle example. Notice the volume starting to pick up on
the right side of the head and then falloff on the left side of the handle. That is the type of action you
want to see.
http://www.optionetics.com/market/articles/2002/01/17/trading-with-the-cup-and-handle-chart-pattern
Most traders with a good deal of experience in technical analysis are familiar with the cup and handle
pattern, which has proven to be a reliable predictor of stock price action when the fundamental
reasons for the action are in place. The cup and handle chart pattern is really a pictorial view of
supply and demand for a particular stock. Some patterns can and do reveal a stock's future price
movement, and the cup and handle formation is one such pattern.
The name for this classic pattern was coined by William O'Neil, founder of Investor's Business
Daily, author of How To Make Money In Stocks, and developer of the CANSLIM stock selection
methods, which I personally utilize when seeking out new investment opportunities. CANSLIM works,
21
plain and simple—and I have had success with it in the daunting task of finding potentially profitable
investment opportunities. The pattern is so-named because it resembles the profile of a coffee cup.
The cup of the pattern typically forms during intermediate-term market corrections. It is
usually three to six months in duration, but can be as long as 12 months during extended
consolidation periods or as brief as six weeks or so in a quick-moving market. The left side of
the cup is a downtrend correcting a previous price advance. The stock price bottoms, a period of
consolidation ensues, and the stock advances, forming the right side of the cup. The handle is
evidenced by another brief period of consolidation lasting several weeks; then the stock often
advances to new highs. The chart below is a cup and handle pattern example.
I’ll now explain the details of the stock’s movement and how those moves correlate with the chart
pattern. The stock starts the pattern trading at $45 per share. During the next 14 weeks, the stock
slides downward and bottoms out at $12.50 in week 21. Then price consolidation takes over and the
stock trades in a $2.50 range for ten weeks.
The fall of the stock can be any event from negative earnings reports, a restatement of earnings, a
highly anticipated product that doesn’t sell as expected, or simply profit taking after a nice run up in
price. The consolidation period occurs because some investors are bottom fishing and may be
looking for a quick profit in a few days or weeks. Others have held the stock during its decline and
now sell on every uptick because they want to salvage any gains in case the stock continues to spiral
downward.
The stock then begins to build a base over the next 12 weeks between $15 and $20. On the
29th week, the stock breaks out of its base and makes a new 17-week high at $22.50. From there the
stock advances steadily for the next five weeks and enters a new period of consolidation. Remember
the bottom fishers who bought between $12.50 and $17.50? They’re now looking at gains between
180% and 250% and are running to the bank. Those who know that the stock is fundamentally sound
and are unaware of any reason for the stock to break down at this point in time are holding through
the period of consolidation while the handle forms and the stock trades in the $30 and $37.50 range
for the next nine weeks. In weeks 41 and 42, the stock advances higher and in many cases will
continue to do so until some new negative piece of company specific or economic news comes out
and causes a sell-off!
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Remember that the stock must be fundamentally sound, or forget it! Beware of stocks that, after the
handle forms, advance too quickly. This is known as a false handle and often leads to a steep
haircut. Look for handles that form over a period of several weeks in a stock with a pattern in the 30
to 52 week range. During the formation of the handle, new buyers step in and smart money adds to
their positions, supporting the stock. When the stock breaks out from its handle, volume should surge
by 40% above its 50-day average volume to confirm that enough demand is present at the stock's
earliest emerging point. The handle should initially drift downward, indicating low volume and enough
disbelievers that consolidation can occur before the breakout. The handle's high—the high on the
right of the cup—is what an investor wants to buy. This may or may not be a new high for the
stock. A cup and handle pattern typically forms after a stock's initial move from depressed levels.
In searching for the pattern, O'Neil found that a stock should have risen by at least 30% prior to
forming the pattern, and in many instances, a stock may have already doubled or tripled. This would
indicate that the company
was fundamentally sound and the stock had already experienced a certain amount of accumulation, a
positive sign for the stock. During the breakout, the stock may rise by 20, 40, or even 60% in a
matter of a few days or weeks. A general sell rule is to unload when the stock’s price is double the
200-day moving average.
This pattern will not predict a winner every time, but has proven to be reliable and is used by many of
the country’s top money managers as a precursor to outsized gains. Read How to Make Money in
Stocks, by William O’Neill published initially in 1988 by McGraw-Hill for more in-depth analysis of this
chart pattern. Good luck and great trading!
http://www.ufxmarkets.com/learn/forex-school/advanced/cup-and-handle-chart-patterns
Described by William O’Neill in 1988, the cup and handle chart pattern was first mentioned in his
book “How to Make Money in Stocks”. It can be either a reversal or a continuation chart pattern, and
presents itself on charts in both a regular bullish form and an inverted bearish form.
Among the more obscure chart formations used in technical analysis, the cup and handle pattern
occurs when a shorter consolidation or shallow correction period happens after a rounded bottom or
top pattern appears. The cup and handle pattern is usually a long term price formation.
The Cup and Handle Pattern Defined
On forex charts, the bullish version of this exchange rate formation resembles a rounded bottom or
cup on the left with a shallower handle to the right. The bottom of the cup should be clearly rounded,
and V shaped bottoms typically do not qualify.
In its bullish presentation, the cup is created by a gradual decline, followed by a gradual rally to a
similar level to that where the initial decline started, thereby forming a rounded bottom with a neckline
at the top that represents a resistance level and the pattern’s breakout point.
23
The cup portion of the pattern should ideally be shallow with the two sides at equal levels at the upper
end of the trading range in a perfect example. Nevertheless, the cup tends to have unequal sides in
many cases.
The handle of the cup is then formed as the market dips mildly below the neckline resistance level
before rising to break it. This event completes the bullish pattern and signals that a continuation of the
previous rally toward the pattern’s measuring objective has commenced. Often, the handle appears to
be a downward sloping flag or pennant formation, while at other times it may appear as a small
retracement.
The inverted cup and handle pattern has bearish implications, and it has the same general
appearance as the cup and handle pattern, just turned upside down.
The Cup and Handle Pattern’s ideal Characteristics
Ideal characteristics of the cup and handle pattern include the following:
(1) Cup Height – the cup should be relatively shallow and U shaped. Deep or V-shaped patterns may
not qualify and should be avoided.
(2) Handle Height – the handles should remain in the upper half of the cup’s price range, but ideally in
the upper third.
(3) Volume – Volume should decrease during the left side of the cup and be below average in the
middle, before increasing during the right side of the cup as the neckline approaches.
Trading the Cup and Handle Pattern
Once a potential bullish cup and handle pattern has been identified, a technical Trader needs to
compute its measuring objective and prepare to enter the market on the long side when a breakout of
its neckline occurs after the handle phase completes.
The measuring objective of the bullish version of the cup and handle pattern is calculated by first
computing the vertical distance between the neckline defined by the points at the rim of the cup and
the price level at the base of the cup, and then projecting that distance upward from the pattern’s
neckline.
A significant increase in volume observed after the breakout above resistance defined by the cup’s
rim or neckline would help confirm the move. A stop loss order could be entered safely beneath the
pattern’s neckline level, which should now provide support to the market. Profits would be taken
ahead of the pattern’s measuring objective.
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http://thepatternsite.com/cup.html
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http://www.nirvanasystems.com/oti/PDFs/CPRM4.pdf
William O’Neill (founder of Investor’s Business Daily) made this pattern famous with his CANSLIM
approach.
He advised watching for a “Inverted Cup & Handle”, a pattern based on a Saucer (Cup) followed by a
Consolidation (Handle). The Saucer tells us that an increase in demand has occurred, and the
Consolidation provides a classic and powerful continuation pattern. The breakouts from the handle
are usually very strong indications of continued upside movement. CPRM4 identifies this type of
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pattern. It is amazingly accurate on stocks that have bottomed or are starting to rally.
http://www.aaii.com/journal/article/predicting-short-term-trends-the-cup-with-handle-pattern.touch
page 1
This article examines a price pattern identified by William O’Neil, founder of Investor’s Business
Daily—the cup-with-handle pattern.
In addition to his role as a publisher, William O’Neil is well-known for his CANSLIM investment
approach, which uses both fundamental and technical analysis to identify potential investment
opportunities. [O’Neil’s CANSLIM approach is outlined in his book “How to Make Money in Stocks,”
1988 McGraw-Hill Company; 272 pages; $10.95.] Beyond the more concrete criteria that make up
CANSLIM, O’Neil looks for stocks that are exhibiting specific patterns, the most common being the
cup-with-handle pattern.
As with most chart patterns, the cup-with-handle pattern derives its name from the way it appears on
a stock chart—a well-formed cup-with-handle pattern resembles the profile of a coffee cup. The
pattern consists of two distinct parts: the cup and the handle. Figure 1 provides an illustration of a
recently formed cup-with-handle pattern for Winnebago Industries.
29
The cup-with-handle pattern is a bullish continuation pattern that is formed by a corrective movement
in price following an upward trend in prices. In the Figure 1 chart for Winnebago, point 1 indicates the
beginning point of the upward movement in price that preceded the cup-with-handle pattern. At this
point—November 10, 2000—the general downtrend that had been in place from March of that year
bottomed out when the price closed at $10.75. Between points 1 and 2, the price of Winnebago rose
almost 76% to close at $18.88 on January 18, 2001. As it became apparent with time, this January
price point forms the left edge of the “cup.”
After reaching a high of $18.88 on January 18 (point 2), the price of Winnebago declined and tested
the price level just below $16 on three occasions (a decline of just over 15% from the January 18
high), forming the base of our cup (from points 2 to 3 on the chart). Between points 3 and 4 we see
that the price rose to retest the high set back in January, eventually closing at a high of $18.70 on
May 2 (point 4). Point 4 is called the buy, or breakout, point, because this is the price level that must
be broken in order to complete the cup-with-handle pattern. The rounded U-shaped price pattern
between points 2 and 4 forms the cup portion of the pattern.
Having identified the cup, where’s the handle? This is formed by a “minor” price correction or decline
once the right edge of the cup is formed. This dip in price is usually attributed to the selling by those
who bought at the last high that marked the beginning of the cup and are looking to get out, as well as
by those selling at the previous high who bought at the lows of the cup. In Figure 1, the price slid
almost 5% between points 4 and 5 to close at $17.80 on May 14 (point 5). Once again the price
rebounded, and less than two weeks later it returned to the levels set at both the left and right sides of
the cup, at which point it meets some resistance. Finally, on May 31 (point 6), the price closes above
the high set at the left side of the cup. As mentioned earlier, the price closing above the highs
established at the right and left sides of the cup is an indication that a breakout is taking place. This is
the point at which you would go long buy the security. Two things can happen: The breakout falls and
the price falls back below the previous highs, or the upward price movement continues. For
Winnebago, the price springboards to 64% to close at a high of $30.75 on June 29.
Volume is another critical factor in technical and chart pattern analysis. In the CANSLIM approach,
the “S” stands for sponsorship—institutional interest in a stock. One indication that institutional money
is flowing into a stock is trading volume that is significantly above its average. Specifically, O’Neil
requires that volume at the breakout be 50% above its 50-day average for trading volume. Another
indication of institutional interest is stronger volume on days the price increases versus those days
where the price decreases.
In Figure 1, the bars in the lower portion below the price chart represent the daily trading volume. The
dotted line running almost horizontally through these bars is the 50-day average for volume; O’Neil
looks for volume to exceed this line by at least 50% once the breakout takes place.
Early on in the formation of the cup in Figure 1—just after point 2 on the chart—there is a general
decline in trading volume, as illustrated by trendline “A” drawn along the tops of the volume bars. This
decline in volume occurs because selling pressure is subsiding as fewer and fewer investors wish to
sell their shares. During this period—from January 19 through the end of February—the daily volume
exceeded the 50-day average volume only twice.
At the base of the cup—March and early April of 2001—there is a significant increase in volume, as
buyers and sellers do battle to see who will wrest control of the stock’s price. Finally, buyers begin to
30
prevail and the price turns upward to form the right side of the cup. The trendline “B” shows the
general increase in volume during the final portion of the cup.
It is during the formation of the handle that volume is key. Beginning at point 5 on the chart through
the breakout that takes place at point 6, there is a tremendous increase in daily trading volume, as
illustrated by trendline “C.” More important is the fact that most of the bars during this period are well
above the 50-day average volume—a clear indication that institutional money is flowing into
Winnebago stock. The highest volume bar on the chart appears on June 5 (shown by the arrow), the
day after the price closed above the high set on January 18. On this day, 345,500 shares of
Winnebago were traded—almost 475% above the 50-day average trading volume of 60,100 shares.
This provides an indication that the upward price trend could continue—which in fact it does.
Some of the more common warning signs that a cup-with-handle pattern will not ultimately carry
through include: A lack of volume support at the breakout,
A handle that falls too far into the cup—into the lower half, and A cup that is more V-shaped than Ushaped.
In the short term, individual securities and the overall market are driven more by investor emotions.
Chart patterns, most of which are short-term in nature, capture this investor psychology. They reflect
the fact that, when faced with similar situations or circumstances, investors will behave in the same
manner again and again.
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The cup-with-handle pattern, like many other chart patterns, can provide investors with insight into a
myriad of investment decisions, including when to enter, the direction in which to trade, and
potentially, when to exit a trade. However, diligence is required to make sure that the pattern you
think is forming actually does follow through. For this reason, it is highly recommended to study the
mechanics of various chart patterns before risking actual capital. Once you become more versed in
these techniques, they could become a useful addition to your investment strategy.
Cup-with-handle at a Glance
Here is a brief outline of the characteristics of a “typical” cup-with-handle pattern.
Keep in mind, however, that not all cup-with-handle patterns will follow these “rules.”
TREND
In order to classify the cup-with-handle pattern—a continuation pattern, there must be a trend in place
to continue. The typical “lead-in” to the pattern lasts a few months; the more mature the uptrend prior
to the cup-with-handle developing, the less apt price is to continue the upward movement once the
breakout takes place.
CUP
Shape: The cup should resemble a cup, meaning it should have a rounded bottom or “U” shape; a
well-developed U ensures that there is sufficient support at the bottom of the cup. Ideally, the sides of
the cup are of approximate height, but this is not necessarily a requirement.
Length: The typical cup-with-handle chart pattern forms over three to six months; the pattern can be
up to 12 months in length during bear markets and as short as one month during bull markets. As a
general rule, the longer the cup, the stronger the price move when the breakout occurs.
Depth: The price should not decline too far in relation to the high that set the left side of the cup;
ideally, the price should not retreat more than one-third from this high. In extremely volatile markets,
you may see retracements of up to two-thirds from the initial high. In general, the shallower the cup
the better.
Retest: Like most price patterns, identifying them involves some subjective interpretation on your
part; with the cup-with-handle pattern, the price does not have to reach the level of the high set at the
left side of the cup. In some cases, the high of the retest can exceed the previous high. The farther
the retest high is below the previous high, the more significant the breakout needs to be in order for
us to be confident that this is a true cup-with-handle pattern.
The Handle
Length: Typically, the handle will form over a period of about one to four weeks; here too, however,
the longer the handle, the stronger the expected price move at breakout.
Depth: As was the case with the cup, the shallower the handle the better; the retracement that forms
the handle should not be more than one-third of the cup’s depth, but at most, one-half; the handle
should not extend into the lower half of the cup.
The Breakout
The breakout takes place when the price exceeds the highs of the left and right sides of the cup; most
use the closing price as the relevant price value.
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Volume
Volume plays an extremely important role in price patterns; price movements on low volume tend not
to sustain themselves. At breakout, the minimum volume typically looked for is that which is 50%
above the 50-day average volume.
Price Target
Once the breakout takes place, you can project the upward price move by measuring the distance
between the right peak, or high, of the cup to the bottom of the cup.
http://www.investopedia.com/university/charts/charts3.asp
A cup-and-handle pattern resembles the shape of a tea cup on a chart. This is a bullish continuation
pattern where the upward trend has paused, and traded down, but will continue in an upward
direction upon the completion of the pattern. This pattern can range from several months to a year,
but its general form remains the same.
The cup-and-handle pattern is preceded by an upward move, which stalls and sells off. The sell-off is
what forms the initial part of this pattern. After the sell-off, the security will basically trade flat for an
extended period of time, with no clear trend. The next part of the pattern is the upward move back
towards the peak of the preceding upward move. The last part of the pattern, known as the handle, is
a relatively smaller downward move before the security moves higher and continues the previous
trend.
Components of the Cup and Handle
There are several components of the cup and handle that should be noted in order to evaluate the
potential trading signal. First, it's important that there is an upward trend before the formation of the
cup and handle. In general, the larger the prior trend is, the lower the potential for a large breakout
after the pattern has been completed. The reason being that a lot of the run-up in the security
happened prior to the formation of the cup, again weakening the size of the potential upward move.
The construct of the cup itself is also important: it should be a nicely rounded formation, similar to a
semi-circle. The reason is that a cup-and-handle pattern is a signal of consolidation within a trend,
where the weaker investors leave the market and new buyers and resolute holders stay in the
security. If the shape of the cup is too sharp (or quick), it is not considered a true consolidation phase
in the upward trend and thus weakens the potential trade signal.
The cup's height should also be a focus: a traditional cup-and-handle pattern should be between onethird and two-thirds the size of the previous upward movement, depending on market volatility. So, if
the move of the preceding trend was from $10 to $35, the height of the cup should be at least $8
(roughly $25 x 33%) to $16 (roughly $25 x 66%). The height of the cup can also be used as an initial
price target after the pattern completes itself and breaks out of the handle.
33
The Handle
Another important component to watch is the handle, as it completes the pattern. As mentioned
before, the handle is the downward move by the security after the upward move on the right side of
the cup. If the handle is downward moving, the general rule is that the handle's downward movement
can retrace one-third of the gain made in the right side of the cup. During this downward move, a
descending trendline can be drawn, which forms the signal for the breakout. A move by the security
above this descending trendline is a signal that the prior upward trend is set to begin.
A more conservative breakout signal would be above the price point of the two peaks in the cup. This
is the price where the initial upward trend peaked and the point where the cup's upward move on the
right side peaked before entering the handle. A breakout above this point is the strongest signal of a
true resumption of the prior trend.
As with most chart patterns, volume is vital in the confirmation of the pattern itself and the signal
formed. Again, the most important area of focus is the breakout: the stronger the volume on the
upward breakout, the clearer the sign that the upward trend will continue. Like the head-andshoulders pattern, the price may move back to the trendline to test the support.
http://www.investopedia.com/terms/c/cupandhandle.asp
Definition of 'Cup and Handle'
A pattern on bar charts resembling a cup with a handle. The cup is in the shape of a "U" and the
handle has a slight downward drift. The right-hand side of the pattern has low trading volume. It can
be as short as seven weeks and as long as 65 weeks.
As the stock comes up to test the old highs, the stock will incur selling pressure by the people who
bought at or near the old high. This selling pressure will make the stock price trade sideways with a
tendency towards a downtrend for four days to four weeks... then it takes off.
Investopedia explains 'Cup and Handle'
A couple points on trying to detect cup and handles: Length –
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Generally, cups with longer and more "U" shaped bottoms, the stronger the signal.
Avoid cups with a sharp "V" bottoms.
Depth - Ideally, the cup should not be too deep.
Also, avoid handles which are too deep since the handles should form in the top half of the cup
pattern. Volume –
Volume should dry up on the decline and remain lower than average in the base of the bowl. It should
then increase when the stock finally starts to make its move back up to test the old high. Retest (of
old high) - doesn't have to touch or come within a few ticks of old high. However, the further the top of
the handle is away from the highs, the more significant the breakout needs to be.
http://www.optionetics.com/market/articles/2002/01/17/trading-with-the-cup-and-handle-chart-pattern
The Cup-and-Handle price pattern is a popular bullish signal that develops over a longer time frame
than many simpler patterns. In this week’s real-time technical analysis example, we’re going to review
a Reverse Cup-and-Handle. As you might expect, this is a bearish signal if the pattern completes.
Let’s take a quick look at the two key components of this pattern.
The first is the “Cup” – a dome-shaped movement of price. It’s good to see both symmetry and a
deep cup. That shows significant, consistent (not knee-jerk trading) price movement to set up the
pattern. You can see from Friday’s chart of Stanley Black & Decker (ticker: SWK, $68.96, up $0.24)
that the Cup met this criteria.
The second part of the pattern is the “Handle”. This typically is a shorter time-frame movement that
indicates consolidation after the longer time-frame Cup. The classic handle for a Reverse Cup-andHandle would be a narrow uptrending channel. In this example, there is a slight uptrend to the highs
but the lows are flat. I’m not as concerned about the Handle meeting the strict definition as long as it
shows consolidation – which it does in this example.
Going into this week, the Reverse Cup-and-Handle would be complete if it closes below the green
dashed support line on strong volume. At that point, look for SWK to re-test the July lows around $60.
Remember that technical patterns are guides and should always be accompanied by disciplined risk
management.
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http://www.invertedcupwithhandle.com/whatisinvertedcup.htm
The Inverted Cup with Handle is formed as a stock in a downtrend enters into a period of
consolidation. The most prominent formations will be during a Bear Market. Just as the Cup with
Handle works best in a strong Bull Market the Inverted Cup with Handle works best in a strong Bear
Market. That doesn’t mean we can’t make money on them in a weak market or one that is moving
sideways.
The Inverted Cup with Handle is a mirror image of the Cup with Handle formation. The Leftside is
formed when a stock makes a bottom and starts back up the chart. The Leftside will be the bar with
the Lowest Close. As the price climbs and begans to move sideways it forms the Base of the Cup and
then descends to form the Rightside of the Cup. The Pivot Point will be the Close of the bar making
up the Rightside. The price will climb up as the Handle is formed. The length of the Handle and how
far it climbs will, like the Cup with Handle, depend on such factors as the type of market we are in and
the strength of investors in the particular stock. When the price decends and Closes below the Pivot
Point on better than average volume we have a break out to the downside.
http://freeonlinetradingeducation.com/inverted-cup-and-handle.html
Definition:
An Inverted Cup and Handle pattern is formed after a pullback from a swing low sells off strongly to
the prior swing low and stalls due to underlying support. The security then stalls much like a bear flag
with slight upward pressure before breaking down below support.
Background:
The power of an Inverted Cup and Handle lies in the fact that after hitting underlying support from the
prior swing low, a very minor correction is put in. The stock then breaks down past support which can
be a sign that overhead supply in the security may be increasing.
Inverted Cup and Handle patterns can be stronger when the next logical place of support on the chart
after the breakdown is a considerable distance away.
Practical Use:
Technical analysts often use Inverted Cup and Handle patterns as selling opportunities because of
their ability to "prove" the lack of buying pressure during the timeframe being assessed.
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http://www.mrswing.com/artman/publish/SwingTracker_stock_scan_/How_To_Trade_Cup_and_Hand
le_3460.shtml
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Screenshots off web
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