What is Cup & Handle chart pattern?
A Cup and Handle can be used as an entry pattern for the continuation of an established bullish trend. It´s one of the easiest patterns to identify. The cup has a soft U-shape, retraces the prior move for about ⅓ and looks like a bowl. After forming the cup, price pulls back to about ⅓ of the cups advance, forming the handle. The full pattern is complete when price breaks out of this consolidation in the direction of the cups advance.
How does it work?
The cup and handle is both a continuation and a reversal pattern. The reversal pattern marks the end of a downtrend, and shows the price transitioning into an uptrend. The continuation pattern occurs during an uptrend; a cup and handle forms, then the price continues its rise. The cup and handle occurs on small time frames like a one-minute chart, and on large time frames like daily, weekly and monthly charts. It occurs when there is a price wave down, followed by a stabilizing period, and followed by a rally of approximately equal size to the prior decline. This creates a U-shape, or cup. The price then moves sideways or drifts downward within a channel. This forms the handle. The handle may also take the form of a triangle.
- To qualify as a continuation pattern, a prior trend should exist.
- The cup should be “U” shaped and resemble a bowl or rounding bottom. A “V” shaped bottom would be considered too sharp of a reversal to qualify.
- The depth of the cup should retrace 1/3 or less of the previous advance.
- The cup can extend from 1 to 6 months, sometimes longer on weekly charts. The handle can be from 1 week to many weeks and ideally completes within 1-4 weeks.
- There should be a substantial increase in volume on the breakout above the handle’s resistance.