Cup And Handle Stock Chart Pattern

A cup and handle is a bullish technical price pattern that appears in the shape of a handled cup on a price chart. A cup and handle is considered a bullish signal extending an uptrend, and it is used to spot opportunities to go long. James Chen, CMT is an expert trader, investment adviser, and global market strategist. Investors should consider the investment objectives and unique risk profile of Exchange Traded Funds carefully before investing.

By placing the stop-loss in the upper third of the cup, it is positioned closer to the entry point. History also indicates that Gold could rise beyond the log target. These cup and handle patterns were a springboard to levels well beyond the log target. The best example of a historical cup and handle pattern is the stock market as the US exited the Great Depression. The cup lasted nine years, the handle four years, and the stock market hit the arithmetic target in four years and log target in over five years. The price action breaks upwards and we apply the two targets.

How To Trade The Cup And Handle Chart Pattern

Sometimes, the left side of the cup is a different height than the right. Use the smaller height, and add it to the breakout point for a conservative target, or use the larger height for an aggressive target. The cup can be spread out from 1 to 6 months, occasionally longer. A head-fake trade is when a security’s price makes a move in one direction, but then reverses course and moves in the opposite direction. The next breakout attempt fails at the prior high, yielding a secondary pullback that holds near resistance, grinding out a smaller rounding bottom, which becomes the “handle.”

cup and handle formation

Above is an example of two cup and handles that formed in the Big Tech share basket on our Next Generation trading platform. The pattern on the left is more complex as the cup pattern is wavy and harder to identify. The pattern on the right is more traditional, with a clear cup shape, followed by a handle breakout to the upside. A V-bottom, where the price drops and then sharply rallies may also form a cup.

The chart above of the Utility SPDR ETF illustrates an inverse cup and handle. After a downtrend, prices reverse in a gentle dome formation creating the cup. Prices change direction by retracing upward and then falling back to the support price level established by the low of the right lip of the cup. Once prices penetrate the low of the right lip of the cup, then a sell signal is triggered and in the chart above prices fall thereafter.

A Comprehensive Guide To Cup And Handle Patterns

It can move sideways as well, or it could decline after entry. Public.com provides cryptocurrency trading through Apex Crypto. Apex Crypto is not a registered broker-dealer or FINRA member. Cryptocurrencies are not securities and your cryptocurrency holdings are not FDIC or SIPC insured.

cup and handle formation

Both groups are now targeted for losses or reduced profits, while short-sellers pat themselves on the back for a job well done. The security returns to resistance for the second time and breaks out, yielding a measured move target equal to the depth of the cup. 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 teacup appearance. A saucer, also called “rounding bottom”, refers to a technical charting pattern that signals a potential reversal in a security’s price. A bull is an investor who invests in a security expecting the price will rise. Discover what bullish investors look for in stocks and other assets.

When the price closes above the trendline, investors may choose to place a limit order just below the breakout level in hopes of executing the order if the price backtracks. Upside-down cup with a handle cup and handle pattern that is angled downward, which forms when there is a drop followed by a rebound up and then another drop. According to Bulkowski , the averaged maximum decline of the inverse cup and handle is 16%.

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It represents a consolidation period for a strong asset, during which traders move away from a stock, which is generally growing well. After this short-term consolidation the stock recovers its lost value and resumes its previous growth. Underlying A cup-and-handle chart pattern resembles a cup of coffee with a cup and handle . It is a bullish continuation pattern that marks a pause in the bullish trend. The entire pattern can be anywhere between 1 month to a little more than year.

During the handle formation, tighter volatility contraction could be better. While cups with a more “U” shaped bottom are preferred, “V” shaped bottom cups are also traded. Opponents, however, argue that a V-shaped bottom indicates lack of price stability before bottoming. The height of the breakout handle is added to the height of the cup to get the target figure. The pattern is complete when the price moves out of the handle. The buy point occurs when the asset breaks out or moves upward through the old point of resistance .

All information regarding the likelihood of potential future investment outcomes are hypothetical. Another method for identifying the profit target is to plot a Fibonacci extension. Plot the extension from the base of the cup to the start of the handle, then to the handle’s low. One hundred percent of the extension is considered a conservative price target for cup and handle pattern breakouts, while 162 percent is considered an aggressive price target. Other characteristics of the pattern that have to do with its shape are also important.

Here, you should wait for the price to retest the now-support level and place a bullish trade. As you can see below, the price of gold has been on a bullish trend for years. The price reached an all-time high of $1920 on September 2011. In most cases, you should ensure that the depth is about a third of the previous upward trend.

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  • Sometime afterwards, the price action reaches the second target on the chart.
  • An ascending triangle is a chart pattern used in technical analysis created by a horizontal and rising trendline.

This article considers why a cup with handle forms, the desirable features of the pattern and how we select them. We will also look at an example of one of the best performing cup-with-handle formations recently. As you see, the price action breaks to the lower level of the S/R zone, which indicated that the price will probably continue in the bearish direction. Note the large bearish move on the chart following the breakdown. We have discussed many different types of chart patterns to date. Today we will talk about a somewhat lesser known pattern but one that is still highly effective.

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Secondly, the price of the asset will stay at this stable point for a period of time. The “handle” can only convert to a breakout when there is strong volume. Check out this step-by-step guide to learn how to find the best opportunities every single day. Follow this step-by-step guide to learn how to scan for hot stocks on the move. With forex trading, you don’t own the underlying asset, which means you can go long or short .

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The cup and handle pattern was made popular by William O’Neil, which now has expanded into all sorts of trading scenarios. Traders have come to know the cup and handle as a bullish continuation pattern that is a highly accurate predictor of sizable breakouts. To learn more about stock chart patterns and how to take advantage of technical analysis Day trading to the fullest, be sure to check out our entire library of predictable chart patterns. These include comprehensive descriptions and images so that you can recognize important chart patterns scenarios and become a better trader. It is interpreted as an indication of bullish sentiment in the market and possible further price increases.

For example, if a cup forms between $99 and $100, the handle should form between $100 and $99.50, and ideally between $100 and $99.65. If the handle is too deep, and it erases most of the gains of the cup, then avoid trading the pattern. The buy point occurs when the stock breaks out or moves upward through the old point of resistance .

Introduction To Technical Analysis Price Patterns

In the market where false signals are readily available, you can essentially use the Ichimoku Cloud to ignore signals, which lack conviction. The last time I checked, simply drawing a line up in the air means absolutely squat. The candles of the handle should have small bodies and in a very tight range. On a 5-minute time frame, the handle is made up of at least 4 candlesticks but no more than 10.

A good way to note this is to use the Fibonacci Retracement. Further, the pattern tells you not to worry when the price reaches at the resistance and either consolidates or starts retreating. When evaluating whether a cup and handle pattern is real, it is important to look at the shapes of both the cup and the handle.

Bullish Cup And Handle Trading Example

Other such patterns are the ascending and descending triangle pattern and bullish and bearish flags and pennants. However, a share price declines it can mean many things, not just the formation of a handle. There’s no good way to distinguish falling asset prices from the first stage of a stock which will make an eventual rally. Lucky investors who get in at the bottom of the cup will, to be sure, make more than those who invest during the handle, but just as often they may predict recoveries that never come. Fourthly, the price of the asset stabilizes for a period of time. In this phase the asset’s price will often decrease by a limited amount, but no more than a third of the cup’s earlier decline.

Before deciding to trade foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. You could sustain a loss of some or all of your initial investment and should not invest money that you cannot afford to lose. The handle has to be smaller than the cup and should only indicate a slight downward trend within the trading range – not one that goes lower than one-third of the way into the cup.

Author: Lorie Konish