Let’s look at several of the more recognizable chart patterns used in technical analysis. This is a follow up to our previous note, “What is Technical Analysis”.
Cup with Handle
This pattern was defined by William J. O’Neil in the 1980s. A cup with a handle is a bullish signal. It is an uptrend and used to identify an investment opportunity to go “long”.
The cup and handle pattern can be found within a variety of time frames, such as hourly, weekly, or monthly charts. But it is likely most powerful on daily chart time frames.
The pattern cannot exist without a prior uptrend.
The cup is in the shape of a “U” and the handle has a slight downward drift. Look for a cup with a longer and more “U” shaped bottom, as it tends to provide a stronger buy signal. A cup should not be overly deep. Additionally, handles should not form from a deep position; rather they should form in the top half of the cup pattern.
3. Rebound to the previous high on increased up volume
4. Drift in pricing with a slight downside on decreased volume
After a rather large uptrend in price, the market begins to correct lower, forming the first half of the cup. As a stock forming the pattern will test former highs, it will generally experience selling pressure from investors who bought at earlier levels. Selling may cause the price to consolidate and form a downtrend before advancing higher. The downtrend may last for several days to months before advancing higher. The pattern may be as short as four weeks or substantially longer, on the order of many months or more. The downtrend typically retraces 30 – 50% of the length of the previous uptrend.
The right-hand side of this pattern generally exhibits lower trading volumes and remains lower than average in the base of the bowl. Volume increases when the stock begins to make its move higher, back up to test the previous high.
How to Trade the Cup with Handle
The handle represents a buying opportunity. The pattern is confirmed when the stock price breaks above the high of the handle.
The handle will form in less time than it takes to form the cup. Typically, the handle will form in about 20% to 35% of the time required to form the cup.
Traders will place a buy stop order at a “stop price” above the upper trendline of the handle part of the pattern. Order execution will occur only if the price breaks the pattern’s resistance. Do not place a limit order slightly below the pattern’s breakout level, as you will be at risk of missing the trade if the price continues to advance and does not pullback.
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A profit target is anticipated by examining the distance between the bottom of the cup and the pattern’s breakout level and extending that distance upward from the breakout. That distance is extrapolated above the pattern’s handle.
A trader may place a stop loss order below the handle or below the cup if they wish to reduce potential losses in a volatile market.
Indicators to Identify the Cup and Handle Pattern
1. Support and resistance
3. Trading volume
3. Moving average on the trading volume
4. Trend lines
The Investor Weekly’s Best Cup and Handle Return-to-Date
BOEING – March 2016
This pattern may take a prolonged period to form. And the pattern cannot be anticipated until nearly all of the cup is completed and the price approaches the old high. And it is possible for a shallow cup, or conversely, a deep cup, to produce a false signal.
Current Example – January 10, 2022
SVB Financial Group (SIVB)SIVB is tracing a cup base with a 763.32 buy point. Shares could be adding a handle this week, but it’s a bit too early to be considered proper. If the handle finishes, the new buy point will be 746.80. Shares skidded nearly 4% midday Monday and are threatening to close below their 50-day moving average line. Earnings are due out Jan. 20 after the market closes. Analysts expect the company’s earnings to fall 13% to $6.47 per share year over year. Revenues are expected to grow 17% vs. the year-ago period.
Stocks to Trade