Cup and handle patterns?
The cup and handle pattern is a bullish continuation formation. The pattern takes on two parts: the cup and the handle. The cup often forms after an advance that looks like a bowl or rounding bottom in the shape of a “U.” The handle is the pullback, typically represented by a short downward trend.
The brief pullback or the handle is an opportunity for a trader or investor to buy. After consolidation, the pattern transitions toward a breakout.
After a cup-and-handle breakout, a bullish rally occurs. The price target or projection depends on the size of the cup. The projected target comes from adding the distance between the bottom of the cup and the pattern’s breakout level and extending that distance from the breakout.
After the initial breakout from the cup and handle pattern, other technical factors, including downtrends, retracements, moving averages, etc., can influence the initial phase of the rally.
The continuation pattern typically develops after a prior uptrend, followed by a consolidation via the cup and handle and a breakout.
Sometimes the cup and handle pattern develop after a prolonged downtrend. If the cup and handle form after a downtrend, it signals an impending reversal of the trend. The continuation pattern should show lighter price contractions heading into the cup and handle.
The cup and handle pattern can be a potentially bullish condition, with the right-hand side of the pattern showing lighter trading volume. The pattern can be as short as seven weeks or 1-year long or more.
The characteristics associated with cup and handle patterns:
The duration of the pattern matters. Cups that develop over time and display “U” shaped bottoms are solid patterns. Cups that quickly form via “V” bottoms are not reliable patterns.
The depth of the cup should not be too deep, as this warns of a false pattern. The handles also need to develop along the top half of the cup pattern.
Sometimes the cup forms without the handle portion.
Volume can help to reaffirm the cup and handle pattern. Volume tends to decline as prices fall and should be lower than average near the base of the cup. Volume tends to expand when the prices move higher, typically to test the previous peak or high. If the pattern fails, this may signal the next downtrend.
Cup and handle patterns that develop in illiquid markets and securities may not be reliable. It is a drawback common in many technical formations.
Retesting a prior resistance is not necessary. The rally can come close to an old high or a reaction high. The further the top of the handle is away from the prior highs, the more significant the breakout is when confirmed.
Enclosed are potential cup and handle patterns developing in popular market indexes, including SPX, INDU, NYA, COMPQ, and NDX.
Although these are potentially bullish developments, signaling bottoms and the start of rallies, failure to confirm breakouts by negating the handles can warn of potentially bearish situations.