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What Is A Cup and Handle?: Key Takeaways

The cup and handle is a technical chart pattern that resembles a cup with a handle, where the cup is in the shape of a "u" and the handle has a slight downward drift. It is considered a bullish signal, with the right side typically seeing lower trading volume. To use it, traders look for the pattern to form over weeks to months then place a buy order if the stock breaks above the handle. The cup and handle indicates the stock may continue an uptrend. However, like all indicators, it has limitations and does not always perform as expected.

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Ali Abdelfatah Mahmoud
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201 views

What Is A Cup and Handle?: Key Takeaways

The cup and handle is a technical chart pattern that resembles a cup with a handle, where the cup is in the shape of a "u" and the handle has a slight downward drift. It is considered a bullish signal, with the right side typically seeing lower trading volume. To use it, traders look for the pattern to form over weeks to months then place a buy order if the stock breaks above the handle. The cup and handle indicates the stock may continue an uptrend. However, like all indicators, it has limitations and does not always perform as expected.

Uploaded by

Ali Abdelfatah Mahmoud
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOC, PDF, TXT or read online on Scribd
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What Is A Cup And Handle?

A cup and handle price pattern on a security's price chart is a technical indicator that resembles a cup with a
handle, where the cup is in the shape of a "u" and the handle has a slight downward drift. The cup and
handle is considered a bullish signal, with the right-hand side of the pattern typically experiencing lower
trading volume. The pattern's formation may be as short as seven weeks or as long as 65 weeks.

KEY TAKEAWAYS
 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.
 A cup and handle is considered a bullish signal extending an uptrend, and is used to spot
opportunities to go long.
 Technical traders using this indicator should place a stop buy order slightly above the upper
trendline of the handle part of the pattern.

What Does A Cup And Handle Tell You?


American technician William J. O'Neil defined the cup and handle (C&H) pattern in his 1988 classic, "How to
Make Money in Stocks," adding technical requirements through a series of articles published in Investor’s
Business Daily, which he founded in 1984. O'Neil included time frame measurements for each component,
as well as a detailed description of the rounded lows that give the pattern its unique tea cup appearance.

As a stock forming this pattern tests old highs, it is likely to incur selling pressure from investors who
previously bought at those levels; selling pressure is likely to make price consolidate with a tendency toward
a downtrend trend for a period of four days to four weeks, before advancing higher. A cup and handle is
considered a bullish continuation pattern and is used to identify buying opportunities.

It is worth considering the following when detecting cup and handle patterns:

 Length: Generally, cups with longer and more "U" shaped bottoms provide a stronger signal. Avoid
cups with a sharp "V" bottoms.
 Depth: Ideally, the cup should not be overly deep. Avoid handles that are overly deep also, as
handles should form in the top half of the cup pattern.
 Volume: Volume should decrease as prices decline and remain lower than average in the base of
the bowl; it should then increase when the stock begins to make its move higher, back up to test
the previous high.

A retest of previous resistance is not required to touch or come within several ticks of the old high; however,
the further the top of the handle is away from the highs, the more significant the breakout needs to be.

Example Of How To Use The Cup And Handle


The image below depicts a classic cup and handle formation. Place a stop buy order slightly above the
upper trend line of the handle. Order execution should only occur if the price breaks the pattern’s resistance.
Traders may experience excess slippage and enter a false breakout using an aggressive entry.
Alternatively, wait for the price to close above the upper trend line of the handle, subsequently place a limit
order slightly below the pattern’s breakout level, attempting to get an execution if the price retraces. There is
a risk of missing the trade if the price continues to advance and does not pull back.
A profit target is determined by measuring the distance between the bottom of the cup and the pattern’s
breakout level, and extending that distance upward from the breakout. For example, if the distance between
the bottom of the cup and handle breakout level is 20 points, a profit target is placed 20 points above the
pattern's handle. Stop loss orders may be placed either below the handle or below the cup depending on the
trader’s risk tolerance and market volatility.

Now let's consider a real-world historical example using Wynn Resorts, Limited (WYNN), which went public
on the Nasdaq exchange near $13 in October 2002 and rose to $154 five years later. The subsequent
decline ended within two points of the initial public offering (IPO) 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. The handle follows the classic pullback expectation, finding support at the
50% retracement in a rounded shape, and returns to the high for a second time 14 months later. The stock
broke out in October 2013 and added 90 points in the following five months.

 Patience is key in these circumstances because testing at the 50-day EMA usually resolves within three to
four price bars. The trick is to stay out of the way until a) the reversal kicks in or b) the level breaks, yielding
a price thrust against your position.
Limitations Of The Cup And Handle
Like all technical indicators, the cup and handle should be used in concert with other signals and indicators
before making a trading decision. Specifically with the cup and handle, certain limitations have been
identified by practitioners. First is that it can take some time for the pattern to fully form, which can lead to
late decisions. While one month to one year is the typical timeframe for a cup and handle to form, it can also
happen quite quickly or take several years to establish itself, making it ambiguous in some cases. Another
issue has to do with the depth of the cup part of the formation. 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.

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