In the domain of technical analysis of market prices, a cup and handle or cup with handle formation is a chart pattern consisting of a drop in the price and a rise back up to the original value, followed a smaller drop and a rise past the previous peak. It is interpreted as an indication of bullish sentiment in the market and possible further price increases.
Cup and Handle
Introduced by William O’Neil in 1988, the cup and handle is a bar chart pattern that resembles a cup with a U-shape rounded bottom and handle that marks a downward drift.
Basically, this pattern displays a trend in upward performance of stocks that is characterized by slight downward pauses before it resumes its upward direction. Simply stated, the cup and handle pattern shows a bullish continuation movement. It is indicative of upward price movements of stocks in the long run.
A trading range successfully develops when the cup with a rounded bottom is completed, while a subsequent breakout that results from the trading range of the handle signals a continuation of a prior advance.
Key Factors to Identify the Cup and Handle Pattern
Here are some points that you should keep in consideration to detect this pattern:
Look for a rounded U shaped bottom in the chart. A rounded U shape shows that it is a consolidation pattern. A V shaped sharp edged bottom shows that it is too sharp for a reversal to qualify.
To successfully qualify as a bullish pattern, a prior trend must exist. Ideally, it should be only a few weeks old. In other words, it shouldn’t be mature. If the trend is mature, there will be lesser chances of developing a bullish continuation bar chart pattern
- Depth of the Cup
Ideally the cup’s depth should be one third or lesser than the prior advance. However, this range can vary between 1/3 and ½ if the market is volatile.
The handle in this chart depicts the final pullback/consolidation before it can successfully retrace up to the 1/3 (one third) of the cup’s advance. Small retracements show more bullish formation.
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