The cup and handle is a classic continuation pattern that combines a rounded consolidation (the cup) with a smaller, tighter consolidation (the handle) before breaking out to new highs. Though widely recognized, the nuances of this pattern, such as the depth of the cup and the importance of market context, are often overlooked. This session will explore how to identify, enter, and manage cup and handle trades with a focus on modern techniques like the price cycle and early entries.

What Is a Cup and Handle Pattern?

Definition: A cup and handle is a bullish continuation pattern that forms after a prior uptrend.

• Cup: A rounded consolidation, often forming a “U” shape
• Handle: A smaller, tighter consolidation near the cup’s upper edge, signaling reduced selling pressure before the breakout

Key Characteristics:

• Depth of the Cup: Ideally, no more than 30% below the prior high, but this can vary depending on market conditions
• Handle Tightness: The handle should show narrowing price action with a slight downward drift
• Breakout: Occurs when price moves above the high of the handle on increased volume

Cup and Handle Pattern Components

Evaluating the Cup’s Depth in Market Context

Why Context Matters:

• If the market experiences a deep correction (e.g., 30-40%), deeper cup patterns (e.g., 40-50%) are more acceptable
• In stable markets with shallow corrections, a deep cup (e.g., 50%) could indicate weakness, often referred to as a “punch bowl of death,” and might fail to breakout

TTD Cup and Handle Pattern – Market Context Analysis

Early Entries Using the Price Cycle

Advantages of Early Entries:

• Allows traders to capture a larger portion of the move while minimizing risk
• Enables building a position before the traditional buy point, which is at the handle’s breakout

Key Price Cycle Stages in a Cup and Handle:

1. Wedge Pop: Often forms near the bottom of the cup, signaling the start of accumulation
2. EMA Crossback: Occurs as the stock begins climbing the right side of the cup
3. Handle Formation: Typically aligns with a basin break or another consolidation pattern

Shakeouts: A Key Signal of Institutional Support

What Is a Shakeout? A shakeout occurs when price briefly dips below a support level but quickly recovers to close higher. This action:

• Removes weak holders
• Signals institutional buying if the stock closes above the shakeout level

Entry and Stop-Loss Strategies

Primary Buy Point:

• Enter as price breaks above the handle’s high on increased volume

Early Buy Point (Advanced):

• Enter during the wedge pop or EMA crossback for an earlier position with a tighter stop

Stop-Loss Placement:

• Place the initial stop just below the handle’s low
• For early entries, use the low of the wedge pop or the EMA crossback as the stop level

Managing the Trade

Position Management:

1. Initial Entry: Begin with a smaller position at the wedge pop or EMA crossback
2. Add to Position: Add during the handle’s breakout to build size
3. Trail Stops: As the trade progresses, move stops higher to lock in gains

Volume Monitoring:

• Heavy volume on the breakout confirms institutional participation
• Watch for declining volume during the handle’s formation, signaling reduced selling pressure