What is a Cup and Handle Pattern?

cup and handle chart pattern

The cup with a handle pattern is the most common and easy to identify chart pattern. It looks just like its name, a silhouette of a coffee or tea cup with a handle. The best of stock opportunities often start with this pattern before exploding out to new highs. This pattern occurs much more often than patterns such as the Double Bottom or the Saucer.

Key Takeaways

-Allow 5-8 weeks to form for best results.

-The best breakouts happen on increased volume of 50% or greater than the daily average.

-Lock in at least some profits around 20%-30% above the buy point when stocks normally cool off.

Formation

Most cups are rounded or flat around the bottom of the pattern, however sometimes they can be much more jagged and sharp. The stock begins to recover as price increases and either reaches but does not surpass the high-point established at the beginning of the pattern, or reaches within 10%-15% below that point, before the price drifts back down slightly, indicating the “handle” part of the cup. As the handle is formed, usually the volume becomes lower and lower. The lower volume is significant because it illustrates the fact that many people who have made some value back from the recent low prices of the stock have now taken their opportunity to sell, and there are now very few people selling the stock compared to average.

Buy Point

The buy point in this pattern is after the handle has formed and the stock price has moved back up to the last peak price (the left side of the cup). Often in this pattern, the price will jump passed the peak price on high volume, signaling an important buy point. The more volume on a breakout, the better. Always be cautious if the breakout occurs on low volume, as it indicates a weaker sentiment. Often times, breakouts will result in an additional 20%-30% increase in price over the next few weeks, before cooling off. For this reason, timing a purchase of shares with a breakout of this pattern can net you some great opportunities.

Time Frame

The pattern usually starts with a downward trend of about 5 to 8 weeks on the left side of the cup; However this pattern can be seen during much shorter or much longer periods of time. It is important to note, the longer a stock is in a pattern, the more likely it is to have a successful breakout. For this reason, we always are more cautious of short term patterns.

Additional Resources

If you prefer a video to explain his pattern, Investor’s Business Daily has created this excellent detailed explanation:

Leave a Reply

Your email address will not be published. Required fields are marked *

Related Posts