Trading Cup & Handle Patterns by Suri Duddella The Cup and Handle Chart pattern was developed and popularized by William J. O’Neil in the 1980s through his CANSLIM methodology, Investors Business Daily newspaper and his book "How to Make Money in Stocks." Cup and Handle pattern resembles a Cup with a Handle. Cup and Handle patterns are continuation patterns, and they usually form in bullish trends. Most Cup and Handle patterns are very reliable and offer great trading opportunities. They also form in all markets and in all time-frames. The “Cup” formation is developed as consolidation phase during price rallies from the round bottom formation over multiple weeks to months. The “Handle” part forms due to a price correction after “Cup” formation and before a clear breakout to the upside. Cup and Handle pattern structure show the momentum pause after reaching a new high in a U-Shape form, followed by another attempt to breakout. When this breakout from the rim of the cup fails it starts to fall back to build the "Handle" structure. Usually, the handle structures are small, and the handle depth should not exceed more than 50% of cup depth. This handle part of the pattern generates interest in buyers as they expect the pattern to breakout from these levels. The pattern is valid only if price convincingly breaks out with increased volume above the rim of the cup levels. Key pattern characteristics Trend: Prior trend before the formation of Cup & Handle pattern must be bullish. Cup Shape: The Cup formation should be "U" shaped and not "V" shaped. Cup Depth: Cup should retrace at least 25% of cup depth but may not be more than 50% of cup depth. Handle: Handle resembles a flag formation in a pullback fashion. Breadth (Width) of Handle is usually small, and it can be 25-40% of Cup's width. Volume: Volume diminishes during the first half of the cup and increases during the right side rise of the cup. Handle also exhibits a similar volume behavior. Volume should see a significant surge during breakout above the rim level. Duration: Cup and Handle patterns must have extended breadth (2 to 12 weeks) to be a valid pattern. How to Trade Entry: Cup and Handle patterns present great bullish trading opportunities. When the pattern breaks out above the rim of the cup, a 'long' trade is entered above the high of the breakout bar. Stop: A stop should be placed below the middle of the handle level. Targets: Targets are placed at 62-79% and 127-162% of the height of the cup above breakout level.
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