Cup and Handle Pattern TraderLion Feature Image Candlestick Chart

What Is The Cup And Handle Pattern?

Cup and Handle Key Points, & Examples

What is The Cup and Handle Pattern?

The “cup and handle” pattern is a widely recognized bullish signal in stock trading. This pattern emerges when a stock's price charts a cup-like shape, followed by a small downturn, known as the “handle.” Key characteristics of this pattern include:

  • Formation of the Cup: The stock price creates a rounded, cup shape. The depth of this cup should be 12-35%.
  • Development of the Handle: A slight dip follows, forming the handle. Crucially, the handle should not drop more than 15% below the cup's left high and should slope down, not up.

William O’Neil, a prominent technical analysis expert, first brought attention to this pattern. In his influential book, “How to Make Money in Stocks“, O’Neil highlights the cup and handle as a reliable indicator of bullish stock opportunities. He observed that stocks displaying this pattern often outperform the market in the following year.

Cup and handle patterns work on all types of stocks, however, if you want to look for only the highest CANSLIM quality growth stocks, you can easily find them with preset scans on Deepvue.

Cup and Handle Pattern Rules

Cup and Handle Pattern Graphic 1 1 1
  • A cup and handle pattern is a bullish continuation pattern.
  • The cup should be rounded and resemble a U shape, not a sharp V.
  • The pattern is formed over a minimum of 7 weeks. (Including Handle)
  • The handle length is a minimum of 1 week.
  • The pattern should form above the 200dma.
  • Base depth should be 12-35%
  • The handle should ideally slope downwards, not upwards.

Cup and Handle Pattern Trading Mistakes

When trading using the cup and handle pattern, it's crucial to avoid common pitfalls to maximize success. Two frequent mistakes are:

  1. Premature Buying: A key error is buying before the handle fully forms. The handle's ideal formation is no more than 15% below the cup's left high. If it dips lower, it could indicate the stock isn't ready for an upward breakout.
  2. Inadequate Risk Management: Despite the cup and handle pattern's reliability, it's not foolproof. Traders sometimes overlook the potential for failure, so it's essential to have a plan for such scenarios. Effective risk management is crucial in every trade, regardless of the pattern's historical reliability.

To help you manage your risk we've put together a free position size calculator you can use to help determine how many shares to buy based on your account size and trade parameters

Is The Cup and Handle A Bullish Pattern?

Yes, the cup and handle pattern is considered a bullish continuation pattern. Strong and high-performing growth stocks generally form cup and handle patterns during their bull runs. The forming of this pattern allows the stock to base or take a “breather” before its next move up and is seen as healthy action. Cup and handle patterns seen in bear markets are generally not as reliable.

The main reason for this is that bear markets are characterized by high levels of fear and uncertainty and investors tend to sell on any break-outs or rallies. This selling pressure creates a hard environment to gain traction after a cup and handle breaks out to the upside.

Remember, a cup and handle pattern signals a healthy rest after a prior uptrend. The prior uptrend is key. In a bear market, there is no such prior uptrend to provide a foundation for the pattern.

What Happens After a Cup and Handle Pattern?

After a cup and handle pattern forms, traders often anticipate certain movements in the stock:

  1. Potential Stock Movement: William O’Neil noted that stocks typically rise about 20-25% after forming this pattern. This observation sets an expectation for stock movement post-pattern formation.
  2. Handling Imperfections: The cup and handle pattern, while useful, is not infallible. Sometimes, the stock may not follow the expected upward trajectory.
  3. Risk Management Strategies:
    • Using Stop-Loss Orders: Implementing stop-loss orders is vital. These orders can limit potential losses if the stock doesn't behave as predicted.
    • Developing an Exit Strategy: Having a well-thought-out trading strategy for exiting is crucial. This plan helps manage situations where the stock doesn't increase as expected after the pattern.

Understanding the Cup and Handle Pattern Size Requirements

To be valid, a cup and handle pattern must meet specific size criteria. The ‘cup' part needs a 12-35% depth. This shows a notable, yet reasonable, retracement. The ‘handle' must develop within 15% of the cup's highest point. This indicates a slight and manageable pullback. Time is also key. The cup should take no less than 7 weeks to form, and the handle should take at least 1 week.

The Market Psychology of the Cup and Handle Pattern

The cup's bottom in this pattern marks a crucial psychological shift. It suggests a level where buyers begin to dominate over sellers, indicating a change in market sentiment. As the price recovers and forms the handle, approaching previous highs, investors who bought at these peaks often sell to break even. This leads to a temporary pullback in prices ‘the handle'. The handle represents the market's last effort to clear out uncertain holders, paving the way for more determined buyers to boost the stock's price.

Stop-Loss Placement

A typical spot for this order is slightly under the handle's lowest point. This position safeguards against a false breakout or a failed pattern. It also allows the stock some movement within the handle's range.

Jump To: What is a bullish engulfing pattern?

Cup and Handle Pattern Examples

A chart depicting the cup and handle pattern.
A chart showing the cup and handle pattern on the cboe vs nasdaq.
A chart showing a cup and handle pattern, indicating a bullish trend.

Jump to: How the Volatility Contraction Pattern (VCP) can boost your trading strategy.

Frequently Asked Questions

A true cup and handle pattern cannot form in a single day as it requires a longer period to properly establish both the cup and the handle. The formation typically takes several weeks to months, allowing for the accumulation and distribution phases to play out.

A cup and handle pattern typically takes a minimum of 7 weeks to form, including the formation of the handle.

William O'Neil, a well-known figure in the world of technical analysis, first identified the cup and handle pattern. He discussed the pattern in his book, “How to Make Money in Stocks,” as a reliable chart pattern for identifying bullish trading opportunities.

To identify a cup and handle pattern, look for the following characteristics:

  • A rounded, U-shaped cup
  • The trading range should be a minimum of 7 weeks to form the pattern (including the handle)
  • The pattern forming above the 200-day moving average
  • Base depth between 12-35%
  • A downward-sloping handle that ideally forms no more than 15% below the left high of the cup

Cup and handle patterns seen in bear markets are generally less reliable due to the high levels of fear and uncertainty that lead investors to sell on break-outs or rallies, creating a challenging environment for the pattern to succeed.

The 200-day moving average is a key technical indicator used to gauge a stock's long-term trend. When the cup and handle pattern forms above this moving average, it suggests that the stock is in a strong uptrend, which increases the likelihood of a successful bullish continuation.

After a cup and handle pattern forms, traders may expect the stock to move higher by about 20-25% based on William O'Neil's findings.

The reliability of the Cup and Handle pattern is influenced by several factors, including the duration and depth of the cup, the handle's retracement, and the volume during the formation. A longer and shallower cup, combined with a handle that retraces less than 50% of the cup's gains, generally indicates a stronger pattern. Additionally, increased volume on the breakout above the handle's resistance level can confirm the pattern's validity.

Just like any pattern the cup and handle alone is not a guarantee of an uptrend continuation or initiation. Traders should use the Cup and Handle pattern alongside other technical analysis tools and indicators to confirm signals and manage risks.

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