What is the “Cup and Handle” Chart Pattern? How Does It Work? (2K Views)

In my experience, the cup and handle chart pattern is one of the most reliable charts out there. It is a continuation/consolidation pattern that occurs after a large uptrend. This pattern is most reliable when it forms after a run of approximately 30%.

The comments above and below are from an article by Michael Battat (StockEthos.com) 

Cup: Conventionally, the cup is a “U” shaped bowl. A “V” shape is too aggressive to be classified as a cup and handle pattern. A perfect pattern has equal highs on each side of the cup, but this is not always the case. What is more important is that there is defined support at the base of the cup.

Cup Depth: For the highest probability of success, the cup should retrace approximately 1/3 of the previous advance. However, it is not uncommon for the cup to retrace between 1/3 and 1/2 of the uptrend, especially in volatile markets.

Handle: The pullback that forms on the right side of the cup is called the handle. The handle marks the final pullback before the stock (ideally) breaks out. This pullback is typically 1/3 the depth of the cup; however, the smaller the pullback, the more bullish the formation. The handle is commonly a flag or pennant that slopes downward.

Duration: The cup can range between one and six months, but can be longer on weekly charts. The handle can form over one or more weeks, but is usually completed within four weeks. In general, however, the handle forms over a shorter period of time than the cup.

Volume: Look for a substantial uptick in volume as the handle forms, and an even larger increase in volume as the stock breaks out above the handle’s resistance. (Here’s why volume is important in technical analysis).

Target: A price target/exit point can be calculated by measuring the distance from the right peak of the cup to the base of the cup. This height is then projected upward from the point of breakout to yield a price target.

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