Cup and Handle
Tue, Apr 15The Cup and Handle is a bullish continuation chart pattern that indicates a period of consolidation followed by a breakout.
Chart patterns emerge when the price of an asset moves in a manner that resembles a familiar shape, such as a rectangle, flag, pennant, head and shoulders, or, in this case, a cup and handle.
This chart pattern consists of two main components:
- The cup
- The handle
The cup forms after a downtrend and is succeeded by an uptrend, resembling a bowl or a rounded bottom. Once the cup is completed, the price tends to trade sideways, establishing a trading range on the right side where the handle is created.
A breakout from the handle’s trading range indicates a continuation of the prior uptrend.
The cup should appear like a bowl or a rounded bottom. Ideally, the pattern would feature equal highs on both sides of the cup; however, perfection is rare, much like finding the perfect partner.
After the high is established on the right side of the cup, a pullback occurs, forming the handle. This handle represents the consolidation phase before the breakout.
The handle must be smaller than the cup and should not dip into the lower half of the cup; ideally, it should remain within the upper third.
If the Cup and Handle pattern is completed successfully, the price is expected to break above the trend established by the handle and reach new highs.
The buy point is identified when the asset breaks out or moves upward through the previous resistance level (the right side of the cup). This breakout should be accompanied by increased trading volume.
The price target following the breakout can be estimated by measuring the distance from the top of the cup to the bottom and adding that value to the buy point.
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