Cup With Handle Chart Pattern

A Cup With Handle chart pattern is a bullish chart pattern that typically signifies higher share prices upon breakout. This pattern should be attempted to be identified using a weekly chart.

Cup patterns are created by a sharp sell-off in a stock, usually based on some news event. The heavy selling starts to fade and then the share price starts to consolidate in a sideways fashion. After most of the selling has been completed, the share price then starts to climb back up to the beginning of where the first downtrend began. This price action forms the Cup part of the pattern.

Some Cup chart patterns go on to form a “handle” also. When a Cup pattern does form a handle, the performance of the share price upon a breakout tends to be greater than patterns without a handle. Thus, most Cups that have Handles perform better than Cups without Handles.

The Cup With Handle chart pattern and Double Bottom chart pattern can look very similar. It sometimes helps to use a checklist to determine between the patterns. One general rule is that a Cup With Handle chart pattern tends to have flatter price action at the bottom of the Cup. A Double Bottom pattern tends to be more volatile when forming the bottom of its pattern.

Requirements

Following are the requirements for a Cup With Handle chart pattern. Since Cups With Handles perform better than Cups Without Handles, I want to focus on the better performing chart pattern of the two. A Cup With Handle is no doubt the better performing of the two.

the “Cup” portion of a Cup With Handle chart pattern should take a minimum of 7 weeks to develop
the Cup should have somewhat symmetrical left and right sides

Here are the requirements for a “proper” Handle in a Cup With Handle chart pattern. A proper Handle will lead to outperformance over other Handles that lack these traits.

the Handle should form in the upper half of the right side of the cup
there should be decreasing selling volume as the Handle develops
the Handle should not pull back more than 15% from the peak of the right side of the cup

Characteristics & Observations

Following are some of the characteristics for better performing Cup patterns that I have observed over the years.

This illustration is what I consider “the perfect set-up” for a Cup With Handle chart pattern. Let’s review the details of the “the perfect set-up“.

A – Some sort of news or earnings event starts the share price to sell-off; the sell-off typically progresses on selling volume that is higher than average trading volume

B – The intensity the sell-off is lessened, as seen by decreasing selling volume leading up to a possible bullish reversal candlestick pattern of some sort

C – A possible bullish reversal candlestick pattern develops on buying volume that is significantly above average; the bottom of the pattern has been established

D – The right side of the Cup does not go higher than the left side of the Cup before the Handle starts to develop.

E – The best performing Cup patterns have Handles. A Cup With Handle will outperform most Cups Without Handles. I ask this question – is a Cup Without a Handle really a Cup pattern? I don’t think so – I will focus on Cup With Handle chart patterns

F – There is decreasing selling volume during the formation of the Handle; when the selling volume dries up and is significantly less than the average trading volume, that can be used an a scale-in entry point to go long

G – There is increasing buying volume on the breakout; the buying volume is significantly above the average trading volume

The more characteristics the Cup With Handle pattern has when compared to “the perfect set-up“, the odds increase for a favorable breakout as well as better the performance after the breakout.

The Cup pattern should also look very symmetrical. For instance, if one side of the cup took 3 weeks to develop, the other shouldn’t take 1. Again, this is just one additional factor to consider when looking for t”he perfect set-up” for a Cup With Handle chart pattern.

Breakout Area

To determine the official breakout area, you must first determine the highest point in the Cup. This can be either the left or right side of the Cup. In “the perfect set-up” illustration above, the high point would be the candlestick near the letter A.

An official breakout would preferably come after the development of a proper Handle. After the Handle develops and the share price starts to rebound, the breakout area is defined as closing above the highest point in the Cup.

You also want to see the share price breakout from the pattern on buying volume that is above average. Above average breakout volume helps to confirm the official breakout from previous attempts which proved to be false breakouts.

Trading Strategies

A close above the highest point in the Cup should be accompanied with above average buying volume. If this is the case, consider making a scale-in purchase to go long the stock at that point. But waiting for an official breakout means losing some of the upside potential. Some like the safety of confirmation of a breakout and then accepting a smaller percentage gain. That is trading with more safety.

For some one that is willing to take on a little additional risk, consider making a scale-in purchase during the development of the Handle. This purchase should be made near the 2nd week of the handle or later. It is imperative to ensure that volume is decreasing during the development of the handle. If not, rather than a Cup With Handle chart pattern, you may have a Double Top chart pattern and could be setting yourself up for bigger losses.

Use candlestick patterns, Elliott waves, Fibonacci percentages or even a MACD Histogram to help confirm your Cup With Handle chart pattern.