A Cup and Handle pattern is a bullish continuation pattern that suggests a consolidation phase within a primary uptrend. The chart depicts a cup-like shape similar to the letter “U” and the handle, which resembles a minor downtrend.
A cup and handle pattern may be as short as several weeks to as long as 1-year. Look for a classic U shape to increase the odds at a legitimate formation. Volume should dry up near the bottom of the cup, signaling selling exhaustion or sellers have lost interest in selling. As the stock emerges from the bottom of the cup, it usually meets resistance, prompting a smaller pattern to develop, aka the “handle.” Typically, the correction within the handle is from 20% to 30% from the base’s left-side high. The second rally to the top of the cup results in a breakout of the handle with increased volume, signaling the resumption of the primary uptrend as traders jump on board the bullish trend.
A cup and handle pattern has a high success rate if the general market undergoes consolidation within a primary bull trend. The accuracy rate for the completion of cup and handle patterns is 65-68%. However, a cup and handle pattern has a poor track record if the general market is correcting within a primary downtrend. As a general guideline, a classic cup and handle pattern price projection is based on the distance from the right top of the cup/handle to the bottom of the cup and adding the number to the breakout.
Over the past month, a short-term cup and handle continuation pattern in the S&P 500 Index (SPX) hints at a bottom. The top of the cup and handle formation at 4,595.31-4,602.11 (1/29 and 2/2/22 highs) represents pivotal resistance. Also, the 61.8% retracement (4,590.95) resides near this resistance zone. A convincing breakout above 4,595-4,602 completes the continuation pattern and suggests +379.49 points or an SPX target at 4,732-4,749 (12/16/21 and 1/12/22 highs), and above this to 4,818.62-4,826 (1/4/22 all-time high and the 161.8% Fibonacci projection), and 4,975-4,982 (cup and handle breakout target).
Initial support rises to 4,451.53 or the 2/4/22 low and the bottom of the handle. Below this suggests 4,292.46 (1/28/22 low and a higher-low pattern) and 4,222.62 (1/24/22 reaction low and the bottom of the cup). Violation of 4,222.62 warns at another SPX sell-off.
The Dow Jones Industrial Average (INDU), NYSE Composite Index (NYA), Nasdaq Composite Index (COMPQ), Nasdaq 100 Index, and other key U.S. stock market indexes are also showing similar cup and handle patterns. Would confirmations of these continuation patterns via breakouts solidify the 1/24/22 lows as market bottoms and signal the resumption of the primary uptrends?