Technical Analysis Guide

What Does Cup and Handle Mean?

The cup and handle formation (also called the cup with handle formation) is a bullish chart pattern that is defined by a chart where a stock drops in value, then rises back up to the original value, then drops a small amount in value, and then rises a small amount in value. The “cup and handle” formation was discovered by William O’Neil, Founder of Investor’s Business Daily, and explained in his top selling book, “How to Make Money in Stocks.”

A pattern on bar charts resembling a cup with a handle. The cup is in the shape of a “U” and the handle has a slight downward drift. The right-hand side of the pattern has low trading volume. It can be as short as seven weeks and as long as 65 weeks.

As the stock comes up to test the old highs, the stock will incur selling pressure by the people who bought at or near the old high. This selling pressure will make the stock price trade sideways with a tendency towards a downtrend for four days to four weeks… then it takes off. Below is an example of a cup and handle chart pattern:

A cup and handle formation is considered to be a bullish signal, and is usually followed by a sharp rise in value. A rather accurate estimation of the expected price rise is found by measuring the price rise from the bottom of the cup to the right side.  The reason for a price rise following a cup and handle formation is largely unknown. Likely because many traders know about this signal and buy when they see it forming thus artificially creating the bullish uptrend.

Important characteristics

• Trend: A cup and handle formation should follow an increase trend, ideally one that is only a few months old. The older the increase trend, the less likely it is that the cup and handle will be an accurate indicator.
• Shape: In a cup and handle formation, the cup must always precede the handle. The cup should form a rounded bowl shape, with an obvious bottom. A V-shaped bowl is said to be avoided. The cup should be fairly shallow, and ideally should retrace about 30% to 50% of the previous increase.  The perfect pattern would have equal highs on either side of the cup, but this is not always the case.
• Duration: The cup should last 1 to 6 months, while the handle should only last for 1 to 4 weeks. These are only approximate values, however; a cup may last anywhere from a few weeks to a few years.
• Volume: The volume of the stock should decrease along with the price during the cup and should increase rapidly near the end of the handle when the price begins to rise

 

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