A Cup with Handle is considered to be a bullish signal.
Cups with Handles are similar in appearance to Rounded Bottoms. Like rounded bottoms, the pattern includes an elongated U-shape. However, the pattern also includes a short period of consolidation of 1-2 weeks in duration, which tends to be downtrending. The pattern is similar in appearance to a coffee cup with a right-side handle, and indicates the potential for an uptrend.
Following are important characteristic to look for in a Cup and Handle.
The cup always precedes the handle. As the cup develops, the price pattern follows a gradual bowl shape. There should be an obvious bottom to the bowl; a v-shaped turn is not a good indicator.
The depth of the cup indicates the potential for a handle and subsequent breakout to develop. The cup should be fairly shallow.
The handle tends to be down sloping, and indicates a period of consolidation. Consolidation occurs when the price seems to bounce between an upper and lower price limit. You can track the down sloping angle of the handle by drawing trendlines across the upper and lower price limits. If the price ascends outside of the trendlines, then it has the potential for breakout. If the price ascends beyond the upper, right side of the cup, then the pattern is confirmed, particularly if it is accompanied with a sharp increase in volume.
Volume tends to parallel the price pattern. Consequently, during the cup formation, as price descends, volume tends to decrease. Following a period of relative inactivity (at the bottom of the cup), the price pattern starts an upward turn and volume tends to increase.
During the handle formation, the volume decreases. However, you will notice an increase in volume when the price breaks out beyond the right side of the cup.
Duration of the Cup and Handle
Rounded Bottoms are long-term patterns. Martin J. Pring identifies that the pattern can occur over a period of about 3 weeks, but can also be observed over several years.
Duration of the Pattern
Like Rounded Bottoms, the Cup with Handle is a long-term pattern. According to O’Neil, the cup duration is between 7 to 65 weeks. According to Gregory Khun, the cup “is usually three to six months in duration but can be as long as 12 months during bear markets or as short as seven weeks during bull markets.” The handle usually develops in 1-2 weeks.
Understandably, investors like to buy at the lowest possible price. Ideally, investors would buy at the bottom of the cup formation. However, by the time the handle formation begins to develop, investors must gauge their level of risk. There is no surefire way to predict when the lowest point will occur, and there is a possibility that the pattern will fail, and breakout in a downtrend.
Some technical analysts believe that the best time to buy is after the handle begins to ascend. According to Rick Martinelli and Barry Hyman, O’Neil “recommends buying stocks only as they break out of the cup-with-handle to new highs”. Khun suggests a more aggressive method of buying stocks. He suggests that “experienced traders can buy in increments in anticipation of a breakout, but it’s tricky.”
The handle will often slope downwards initially, however, watch for the price to breakout beyond the price at the right side of the cup. The depth of the cup from the right side is an indicator for the potential price increase. However, Bulkowski notes, “Many cups fail after rising only 10% to 15%. Be sure to use stop-loss orders to limit losses or to maximize gains”.
Volume tends to parallel the price formation. During the handle formation, watch for the price and volume to increase. An increase in volume is an indication that the pattern has potential to continue the uptrend, and ascend beyond the right side of the cup.
There are v-shaped patterns that yield successful returns, however, during the cup formation, watch for a rounded shape because the rounded shape provides a more reliable and predictable formation.
Down sloping handles
The handle will tend to be down sloping, however the following criteria indicate a potential failure:
1. the handle should not drop below the top half of the cup formation
2. the price should not drop below the 200 day Moving Average