Cup and Handle

What Is a Cup and Handle?

A cup and handle price pattern on a security's price chart is a technical indicator that looks like a cup with a handle, where the cup is looking like a "u" and the handle has a slight descending drift. The cup and handle is viewed as a bullish signal, with the right-hand side of the pattern normally encountering lower trading volume. The pattern's formation might be essentially as short as seven weeks or up to 65 weeks.

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 distributed in Investor's Business Daily, which he established in 1984. O'Neil included time period estimations for every part, as well as a nitty gritty description of the adjusted lows that give the pattern its unique teacup appearance.

As a stock forming this pattern tests old highs, it is probably going to cause selling pressure from investors who previously bought at those levels; selling pressure is probably going to cause price to consolidate with a propensity toward a downtrend trend for a period of four days to about a month, before progressing higher. A cup and handle is viewed as a bullish continuation pattern and is utilized to recognize buying opportunities.

It is worth thinking about the following while recognizing cup and handle patterns:

• Length: Generally, cups with longer and then some "U" molded bottoms give a more grounded signal. Stay away from cups with sharp "V" bottoms.
• Depth: Ideally, the cup ought not be excessively deep. Stay away from handles that are excessively deep additionally, as handles ought to form in the top half of the cup pattern.
• Volume: Volume ought to diminish as prices decline and remain lower than average in the base of the bowl; it ought to then increase when the stock starts to take its action higher, back up to test the previous high.

A retest of previous resistance isn't required to contact or go inside several ticks of the old high; in any case, the further the highest point of the handle is away from the highs, the more huge the breakout should be.

Illustration of How to Use the Cup and Handle

The picture below portrays a classic cup and handle formation. Place a stop buy order somewhat over the upper trend line of the handle. Order execution ought to possibly happen assuming the price breaks the pattern's resistance. Traders might experience excess slippage and enter a false breakout utilizing an aggressive entry. On the other hand, trust that the price will close over the upper trend line of the handle, subsequently place a limit order somewhat below the pattern's breakout level, endeavoring to get an execution assuming the price follows. There is a risk of missing the trade on the off chance that the price proceeds to advance and doesn't pull back.

A profit target is determined by measuring the distance between the lower part of the cup and the pattern's breakout level and broadening that distance up from the breakout. For instance, on the off chance that the distance between the lower part of the cup and handle breakout level is 20 points, a profit target is placed 20 points over the pattern's handle. Stop-loss orders might be placed either below the handle or below the cup contingent upon the trader's risk tolerance and market volatility.

Presently we should consider a genuine historical model utilizing Wynn Resorts, Limited (WYNN), which opened up to the world on the Nasdaq exchange close $13 in October 2002 and rose to $154 five years later. The subsequent decline ended inside two points of the initial public offering (IPO) price, far surpassing O'Neil's requirement for a shallow cup high in the prior trend. The subsequent recovery wave arrived at the prior high in 2011, almost 10 years after the principal print. The handle follows the classic pullback expectation, finding support at the half retracement in an adjusted shape, and returns to the high for a subsequent time frame 14 months later. The stock broke out in October 2013 and added 90 points in the following five months.

Limitations of the Cup and Handle

Like every technical indicator, the cup and handle ought to be utilized working together with different signals and indicators before settling on a trading choice. In particular, with the cup and handle, certain limitations have been distinguished by experts. The first is that it can require an investment for the pattern to completely form, which can lead to late decisions. While one month to one year is the commonplace time period for a cup and handle to form, it can likewise happen rapidly or require several years to lay down a good foundation for itself, making it uncertain sometimes.

Another issue has to do with the depth of the cup part of the formation. Sometimes a shallower cup can be a signal, while different times a deep cup can create a false signal. Sometimes the cup forms without the characteristic handle. At last, one limitation shared across numerous technical patterns is that it tends to be problematic in illiquid stocks.

Highlights

• A cup and handle is a technical chart pattern that looks like a cup and handle where the cup is looking like a "u" and the handle has a slight descending drift.
• A cup and handle is viewed as a bullish signal expanding an uptrend, and it is utilized to spot opportunities to go long.
• Technical traders utilizing this indicator ought to place a stop buy order somewhat over the upper trendline of the handle part of the pattern.

FAQ

Is a Cup and Handle Pattern Bullish?

When in doubt, cup and handle patterns are bullish price formations. The organizer behind the term, William O'Neil, distinguished four primary phases of this technical trading pattern. To start with, roughly one to 90 days before the "cup" pattern starts, a security will come to another high in an uptrend. Second, the security will backtrack, dropping something like half of the previous high making a rounding base. Third, the security will rebound to its previous high, yet subsequently decline, forming the "handle" part of the formation. At long last, the security breaks out once more, astounding its highs that are equivalent to the depth of the cup's low point.

What Does a Cup and Handle Pattern Indicate?

A cup and handle is a technical indicator where the price movement of a security looks like a "cup" followed by a descending trending price pattern. This drop, or "handle" is intended to signal a buying opportunity to go long on a security. At the point when this part of the price formation is finished, the security might reverse course and arrive at new highs. Ordinarily, cup and handle patterns fall between seven weeks to more than a year.

How Do You Find a Cup and Handle Pattern?

Consider a scenario where a stock has as of late arrived at a high after huge momentum yet has since remedied, falling practically half. As of now, an investor might purchase the stock, guessing that it will bounce back to previous levels. The stock then rebounds, testing the previous high resistance levels, after which it falls into a sideways trend. In the last leg of the pattern, the stock surpasses these resistance levels, taking off half over the previous high.