Cup and Handle
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WHAT TO LOOK FOR
The Cup and Handle pattern is characterized by two distinct features. First, there is a "U" shaped chart pattern which is considered "The Cup". The Cup is followed by a slight consolidation or downtrend which forms "The Handle." The pattern is considered to be a bullish continuation pattern. Therefore, once price breaks above the handle, a significance advance in price would be expected.
Key aspects of the Cup and Handle Pattern
- Trend: Because the Cup and Handle is ultimately a continuation pattern, it should be preceded by an uptrend. Typically this trend would be around a few months old.
- Cup: The cup should be a "U" shape with valid support levels at the bottom. Be careful to avoid a cup that is a "V" shape. A "V" shape is considered too sharp of a reversal to qualify. Ideally, both sides of the cup would be equal heights. However, this is fairly uncommon. Much like any pattern, it is rare for all aspects to line up with exact precision.
- Cup Depth: Remember, the cup shape is a retracement of a previous advance. The depth of the cup should retrace 1/3 or less of the previous advance. However, because of volatile conditions and variables, the depth can really be a range of 1/3 to 2/3 retracements of the previous advance.
- Handle: After the formation of the right side of the cup, the handle is formed. The handle can sometimes resemble a flag or pennant that slopes downward. It can also be a simple, short pullback. The handle represents the final consolidation/pullback before price breaks out. Typically, the handle should be no more than a 1/3 retracement of the cup's advance. Keep in mind that the smaller the retracement, the more bullish the formation. It may also be a good idea to wait for a break above the resistance line established by the highs of the cup.
- Volume: Volume should follow along rather closely with the shape of the cup as it is being formed. For example, volume will typically be on the decline as the left side of the cup forms amid falling prices. Along the bottom or base of the cup formation, volume will typically remain lower than average. Once price begins to rise, forming the right side of the cup, volume should significantly increase.
- Duration: The duration of the pattern can vary greatly. For example, the cup can extend from 1 to 6 months (and sometimes longer). The handle would ideally last for 1-4 weeks but in some cases can be longer.