The Cup and Handle Pattern
Cup and Handle Summary, Psychology, Key Points, and Examples
The cup and handle pattern is a continuation pattern found during uptrends used to identify buying opportunities that were originally defined in “How to Make Money in Stocks” by William O’Neil. It gets its name because it resembles a cup with a handle in appearance. It is one of the easiest patterns to identify. This stock pattern forms over a minimum of 7 weeks.
After a stock market advance, the stock pulls back and forms a rounded bottom resembling a U as it climbs back up the right side. After the right side of the cup is formed there is another shallower pullback that forms the handle. The handle should not be that deep and should remain in the upper half of the cup’s range. A shallower handle shows more strength than a deep one. The handle should slope downwards, never upwards.
Volume should decrease at the base of the cup and at the bottom of the handle. While this isn’t necessary it is a sign of strength.
The buy point is presented when price breaks out the upper trendline of the handle. Volume should be running well above average when the stock breaks out.
Many investors that bought shares near all-time highs before the left side of the cup was formed are looking to recoup their lost money. The handle shakes out weak shareholders before the real move happens. The shakeout is healthy for the pattern because when weaker hands tend to flood a position, they are more inclined to sell as price rises or breaks out. When they are shaken out of the stock it also adds extra buyers instead of sellers when the stock officially breaks out.
- 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% however it can be deeper in a bear market.