Cup and handle pattern

A cup and handle is a price pattern named after its shape. The cup is a rounded decline and recovery that brings price back to the earlier high. The handle is a small pullback or sideways drift just under that high. The pattern is complete when price closes above the top of the handle.

The reading: the cup absorbs the selling from the earlier high, the handle shakes out the last impatient holders, and the breakout shows that demand has taken over.

The pattern is drawn by hand. On Charts a horizontal trend line or a rectangle marks the rim, and Replay shows how past cups resolved candle by candle.

• Prior uptrend – the pattern continues an advance, so there must be one before the cup.
• Cup – a U-shaped base. A rounded bottom is preferred to a sharp V, because it gives the market time to work through the selling.
• Rim – the two highs of the cup at about the same level. A line through them marks resistance.
• Handle – a short pullback that stays in the upper half of the cup and drifts down or sideways.
• Volume – volume often dries up at the bottom of the cup and in the handle, then rises on the breakout.

William O'Neil introduced the pattern in How to Make Money in Stocks (1988). His guidelines were written for daily and weekly stock charts:

• Before the cup the stock should already have advanced by about 30% or more.
• The cup lasts from 7 to 65 weeks. Most take three to six months.
• The usual cup depth is 12% to 33% from the high. Deeper cups appear in bear markets.
• The handle normally takes at least one to two weeks and forms in the upper half of the pattern.
• The buy point is just above the high of the handle, and the breakout should come on clearly higher volume.

• Entry – on a close above the high of the handle. A more conservative entry waits for a close above the rim of the cup.
• Stop – below the low of the handle. If the handle is deep, the stop is wide and the position has to be smaller.
• Target – the depth of the cup added to the breakout level. A cup from 100 down to 80 is 20 points deep, so a breakout at 100 gives a measured target of 120. It is an estimate, not a level price has to reach.
• Retest – price often comes back to the rim after the breakout. Holding above it keeps the pattern valid.

The inverted cup and handle is the bearish mirror of the pattern. Price rises, rounds over in an upside-down U and falls back to the level where the rise began. A small bounce follows – the handle – and then price breaks below the low of the handle.

It is read as a bearish pattern: a continuation in a downtrend, or a top after a long rise. The rules are mirrored. The entry is a close below the handle, the stop goes above the high of the handle, and the target is the height of the cup projected down from the break.

• Buying inside the handle – until price closes above it, the handle can turn into a deeper decline.
• Accepting a V-shaped cup – a sharp drop and an equally sharp recovery is not a base, and such breakouts fail more often.
• Accepting a deep handle – a handle that falls into the lower half of the cup shows that sellers are still active.
• Ignoring volume – a breakout on low volume is treated with caution.
• Looking for the pattern without an uptrend – a cup after a long decline is a possible bottom, not a continuation pattern.