A cup-and-handle pattern, illustrated below, is considered a bullish trading trend. It represents a consolidation period for a strong asset, during which traders move away from a stock, which is generally growing well. After this short-term consolidation the stock recovers its lost value and resumes its previous growth. The rounded part is the Cup and the small bearish channel is the handle. The confirmation of the formation is illustrated with the small green circle when the price action breaks the handle downwards. This would be an advantageous time to sell the USD/CAD Forex pair.
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 term continuation pattern, normally observed on weekly charts. Continuation patterns indicate that there is a greater probability of the continuation of a trend than a trend reversal.. These patterns are generally formed when the price action enters a consolidation phase during a pre-existing trend. During the consolidation phase, the trend appears to change; however, the continuation of the preceding trend is more probable. The price projection for the cup and handle pattern can be calculated by measuring the depth of the cup, i.e., from the peaks at the top of the cup to the bottom of hte cup.
During this phase the stock may be the subject of positive Wall Street analyst comments, a new product announcement or legal victory. As the rally gains steam sentiment improves dramatically and new buyers begin to talk about certain new highs but those that purchased the stock at or near top#1 get ready to sell. These investors may have been waiting as long at 12 weeks for an opportunity to sell their positions without incurring a loss and they are not dissuaded by all of the new found bullish talk. Just short of the old highs at top#1 aggressive selling begins on no specific news but in reality some investors that bought near top#1 have already begun to sell. The stock begins to work significantly lower on increased volume creating a second, well defined top (top#2). The Cup with Handle trigger signal is at the break out of the handle.
Picking A Target Or Profitable Exit
Remember in this line of work, you just need to be a little bit better than the next trader to make a living. Now that we have covered a short introduction to the cup and handle pattern, let’s walk through a few day trading strategies that can separate you from the crowd. If you’re not ready to take on the live markets, you can open a risk-free demo account to identify the cup and handle pattern and practice your trades. A cup and handle is a technical chart pattern that resembles a cup and handle where the cup is in the shape of a “u” and the handle has a slight downward drift.
When this part of the price formation is over, the security may reverse course and reach new highs. Typically, cup and handle patterns fall between seven weeks to over a year. The chart above of the Utility SPDR ETF illustrates an inverse cup and handle. After a downtrend, prices reverse in a gentle dome formation creating the cup. Prices change direction by retracing upward and then falling back to the support price level established by the low of the right lip of the cup.
Regular Cup And Handle Pattern
The cup should be more U-shaped than V-shaped, as a gentle pullback from the high is more indicative of consolidation than a sharp reversal. The U-shape also demonstrates that there is strong support at the base of the cup and the cup depth should retrace less than 1/3 of the advance prior to the consolidation pullback. However, cup depths between 1/3 to ½ the level of the prior advance are possible in volatile markets, and even cup depths retracing 2/3 of the prior advance are possible in extreme setups.
- Cup and handle patterns form as the result of consolidation after an uptrending stock tests its previous highs.
- In fact, in most cases, the Handle would not exceed beyond one-third of the distance between these two points.
- If the pattern is bullish, buy when the price breaks the handle upwards.
- The stop-loss serves to control risk on the trade by selling the position if the price declines enough to invalidate the pattern.
- Therefore, it is critical that you manage your risk appropriately with a Stop Loss.
- Although the pattern formed and the price did decline, ultimately, the price did not follow through to the downside.
As we said, the classic cup and handle pattern has its bearish equivalent – the bearish Cup & Handle, which is a mirror image of the standard Cup & Handle. Sometimes, the beginning of the decrease and the end of the increase could diverge in terms of the level they are supposed to be located at. However, a small discrepancy between the tops of the two trends is admissible. The Cup and Handle pattern is a chart figure, which has a bullish potential. The pattern could appear after a price increase or a price decrease. Of course the pattern has its bearish equivalent, the Inverted Cup and Handle, which we will touch upon later as well.
Determining Stop Loss Level
✅This pattern is not as popular among traders as “Head and Shoulders”, “Double Top” and other classic patterns of technical analysis. In fact, the “Cup & Handle” pattern is in no way inferior to the above patterns in its reliability and, if used correctly, can bring… Draw the extension tool from the cup low to the high on the right of the cup, and then connect it down to the handle low. The one-level, or 100%, represents a conservative price target, and 1.618, or 162%, is a very aggressive target. Whatever the height of the cup is, add that height to the breakout point of the handle. For example, if the cup forms between $100 and $99, and the breakout point is $100, the target is $101.
This means that the bottom should be a bit rounded and not like a V. This is because the latter is usually considered a very sharp reversal. Check out this guide to learn how to scan for active low float stocks daily. Here’s how you can scan for the best undervalued stocks every day with Scanz. Check out this step-by-step guide to learn how to scan for the best momentum stocks every day with Scanz.
Why Does The Cup Form?
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It usually ends in the same place it started – at the top of the Cup, more or less. After this point, the trend is supposed to rise for some time. In the bottom area, the volume is usually much lower than before.
If the stock is unable to close above the cloud, then the bears are in control and longs should step aside. Let’s walk through a few chart examples to illustrate the trading strategy. Prices then break the uptrend established by the right side of the cup, thus creating the handle.
If the price oscillated up and down a number of times within the handle, a stop-loss might also be placed below the most recent swing low. While the price is expected to rise, that doesn’t mean it will. The price could rise a little and then fall, it could move sideways, or it could fall right after entry. Please see the further, important disclosures about the risks and costs of trading, and client responsibilities for maintenance of an account through our firm, available on this website. The handle should last no longer than one quarter of or one-third of the cup’s duration, and it should not retrace more than 38% of the move from the bottom of the cup to the top. Lastly, you might want to learn other common patterns to see if the initial stages of the Cup could actually be some other, less complex pattern.
Timespans Of An Average Cup And Handle Pattern
The Cup with Handle confirmation comes when the price breaks out of the handle. The Cup with Handle pattern has its bearish equivalent, Hedge and is referred to as an Inverted Cup and Handle formation. This is the hourly chart of the USD/CAD Forex pair for March 25-30, 2016.
Commodity and historical index data provided by Pinnacle Data Corporation. Unless otherwise indicated, all data is delayed by 15 minutes. The information provided by StockCharts.com, Inc. is not investment advice. A breakout trader looks for levels that a security hasn’t been able to move beyond, and waits for it to move beyond those levels, as it could keep moving in that direction. A bull is an investor who invests in a security expecting the price will rise. Discover what bullish investors look for in stocks and other assets.
When many people trade the same security at the same time, the trend is more reluctant to change and vice versa. Patterns are specific asset price movements within a certain time period. What they usually reflect is the behavior of the traders in response to some developments inside the market. The cup and handle pattern is a common method you can use to analyse the trend of assets. You can use it to analyse stocks, currencies, bonds, commodities, and index funds among others.
Robo advisors are automated investment services that provide low-cost portfolio diversification and automated money management for people who want to invest passively without hiring a financial… Now, without further ado, let us discuss each of these three characteristics of the Cup and Handle Pattern to fully understand how you can interpret these while making trading decisions. In essence, the Cup and Handle Pattern graphically depicts four phases in the price change of an asset. Place a stop-loss below the most recent low in the handle pattern.
An ‘inverted cup and handle’ is a chart pattern that indicates bearish continuation, triggering a sell signal. The subsequent decline ended within two points of theinitial public offering price, far exceeding O’Neil’s requirement for a shallow cup high in the prior trend. The subsequent recovery wave reached the prior high in 2011, nearly 10 years after the first print.
At this point investors expect it to remain stable for a period of time before resuming its previous growth. This means that the handle of a cup and handle is considered a strong indication that the stock is poised for growth. A cup-and-handle pattern can take place over any period of time. Some patterns emerge during day trading, forming over the course of hours, while others can take shape over the better part of a year. Often the asset’s price will remain at its low point for weeks or even months before recovering its value.
Next, this downward sloping price gradually hits a lower limit, becoming flat. This gives shape to the bottom of the Cup and marks completion to the second phase of the pattern. Volume should contract as the handle forms and then expand on the breakout. We recommend that you combine it with other tools like Fibonacci and indicators like moving averages. In most cases, you should ensure that the depth is about a third of the previous upward trend. Further, the pattern tells you not to worry when the price reaches at the resistance and either consolidates or starts retreating.
The cup can develop over a period of one to six months on daily charts, or even longer on weekly charts. Ideally, the highs on the left and right side of the cup are at roughly the same price level, corresponding to a single resistance level. The cup and handle pattern is a bullish continuation pattern that consists of two parts, the cup and the handle.
To simply apply the same price target logic to every stock formation in the market sounds a bit off, when you think about it. You should not treat any opinion expressed in this material as a specific inducement to make any Credit note investment or follow any strategy, but only as an expression of opinion. This material does not consider your investment objectives, financial situation or needs and is not intended as recommendations appropriate for you.
A stop-loss can be placed below the low price point in the handle. Below is an example of an inverted cup and handle on the FTSE 100 weekly chart. Although the pattern formed and the price did decline, ultimately, the price did not follow through to the downside. The price may drop cup and handle chart pattern slightly, then rally back up, forming another handle or breaking above the initial handle. There is also an upside-down cup and handle pattern, called the inverted or reverse cup and handle. This is a bearish pattern and it looks different to the traditional cup and handle.
Author: Paul R. La Monica