The cup and handle chart pattern is one of many classic chart patterns within technical analysis. The pattern literally has the shape of a 'cup with handle', hence the name. The cup and handle pattern becomes visible in an uptrend, when the price consolidates. The end of the price pattern is marked by a breakout from the 'handle'. Because the breakout occurs in the same direction as the previous main trend, the cup and handle pattern is a bullish continuation pattern.
Here are a few recent examples of cup and handle patterns in the stock market.
Cup and Handle pattern in the stock 'Edwards Lifesciences Corp' in the period May/June 2021 with a bullish breakout candle on date of June 10, 2021 followed by a continuation of the bullish trend.
Cup and Handle in CBRE Group Inc between early December 2020 and early February 2021 with the bullish breakout candle on February 04, 2021.
As seen on the charts, the chart pattern consists of two parts. The first part occurs after a price increase. The price then falls back a bit and forms a sort of rounded bottom before rising again and forming the actual 'cup'. Because the previous high acts as resistance, there is a second but smaller price drop which results in the typical 'handle' on the right side of the 'cup'. The Cup and Handle pattern is completed, the moment a clear breakout occurs above the line connecting the tops of the pattern.
The pattern was first discussed in the book "How to Make Money in Stocks," by William J. O'Neil. "How to Make Money in Stocks," by William J. O'Neil.
There should be a clear difference between the 'cup' and the 'handle'. Not only in time (the handle forms faster than the cup), but also the absolute price bottom of the 'handle' should be higher than the price bottom of the 'cup', otherwise it is simply a double bottom.
Always keep a close eye on the volume with which the pattern is forming. Patterns in which the selling volume during the intermediate price drop in the 'cup' is smaller than the buying volume at the rounding of the bottom (when the price rises again) are preferable.
The existing long-term trend should be respected. A too sharp decline in the 'cup' may be an indication that the existing long-term trend is weakening and on its last legs.
Higher buying volume before or during the breakout is preferable, the more volume the greater the momentum with which the breakout occurs and the less likely it will be a fake breakout.
Because the Cup and Handle pattern takes some time to fully develop, it is difficult for some traders to resist the temptation to take a long position before the pattern is completed. But until the pattern is completed there are so many other variations possible that there is really no point in doing so.
How you can actually start using this pattern in a trading strategy you can read in this article.
The ChartMill Team