In early Sept, the stock broke handle resistance with a gap up and volume expansion green arrow. 

The stock peaked in March and then began to pull back and consolidate its large gains.

What is 'Cup and Handle' 

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Enter long when the price breaks above the upper handle trendline. Place a stop loss below the low of the handle. This controls the risk on the trade in case the price moves lower again. Price Target Add the height of the cup to the breakout point on the handle. This provides an estimated target for the next advance. As discussed in the cup and handle reversal section, uptrends can last for years. The target represents a target for the next rally, but that target could be exceeded as the long-term uptrend unfolds.

Trading Considerations The cup and handle continuation patterns has two positive factors working for it: The combination of these two factors make it a more reliable pattern than the cup and handle reversal. The reward on both the continuation and reversal patterns outweigh the risk, since the anticipated target is the height of the pattern, or more.

The risk, on the other hand, is based on the size of the handle which is smaller than half the size of the cup.

Sometimes this handle resembles a flag or pennant that slopes downward, other times it is just a short pullback. The smaller the retracement, the more bullish the formation and significant the breakout.

Sometimes it is prudent to wait for a break above the resistance line established by the highs of the cup. The cup can extend from 1 to 6 months, sometimes longer on weekly charts.

The handle can be from 1 week to many weeks and ideally completes within weeks. There should be a substantial increase in volume on the breakout above the handle's resistance. The projected advance after breakout can be estimated by measuring the distance from the right peak of the cup to the bottom of the cup. As with most chart patterns, it is more important to capture the essence of the pattern than the particulars.

The cup is a bowl-shaped consolidation and the handle is a short pullback followed by a breakout with expanding volume. EMC established the bull trend by advancing from 10 and change to above 30 in about 5 months. Some of us may not be rocket scientists; however, everyone I know has used a cup in their lifetime. Rather than trying to define what a cup and handle pattern is in words, it's best to use a picture to illustrate the pattern.

Cup and Handle Chart As you can see from the above example, the cup is really a rounding of price action near a series of lows.

There is a left, base and right side of the cup. One of the key characteristics is volume will be heavy on the left, light in the middle and pick up again on the right side of the cup. When you layer the volume on top of the price action, they both can look like two Us on the chart. Any who, as the price approaches the creek or top of resistance, the stock will have a minor pullback, thus creating the handle. Once this pullback or handle is complete, we are off to the races.

One point of clarification, you should not worry yourself trying to come up with exact measurements for your cup and handle pattern. The funny thing about the formation is that while the handle is the smallest portion of the pattern, it is actually the most important. The handle is the catapult or catalyst, which can send a stock screaming higher. My favorite setup for the cup and handle pattern is one with the following strong handle characteristics: On a 5-minute time frame, the handle is made up of at least 4 candlesticks but no more than The reason I like to time box the handle, is because I want to avoid the scenario of being trapped in a sideways conundrum.

The candles of the handle should have small bodies and in a very tight range. The breakout should produce significant volume and price expansion. The breakout candle needs to close above the resistance line of the handle I like to call this the strong handle breakout as the pattern is displaying significant strength in terms of price action, volume and speed. One thing to call out is that the breakout after a strong handle will primarily occur during two times: You can't find a more quite time to trade the markets than late afternoon when everyone is off at lunch or have finished trading for the day.

 

Things To Keep In Mind 

A cup and handle price pattern on bar charts resembles a cup and handle where the cup is in the shape of a "U" and the handle has a slight downward drift.

A cup-and-handle pattern resembles the shape of a tea cup. It can be a trend continuation pattern or a reversal pattern, depending on the context. Cup with Handle (Continuation) The Cup with Handle is a bullish continuation pattern that marks a consolidation period followed by a breakout. It was developed by William O'Neil and introduced in his book, How to Make Money in Stocks. 

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BREAKING DOWN 'Cup and Handle'

Chart patterns occur when the price of an asset moves in a way that resembles a common shape, like a triangle, rectangle, head and shoulders, or a cup and handle. These patterns are a visual way to trade. They provide a logical entry point, stop loss location for managing risk, and a price target. The cup-with-handle chart pattern is to serious investors what the single is to a baseball fan. It's the starting point for scoring runs and winning the investing game.

The Cup And Handle Pattern is a continuation pattern that occurs when markets consolidate and pause before breaking out. Learn to recognize this pattern. Our TP1 was achieved at yesterday and price respected a major s/r trendline by creating a top and making a reversal Today which was also necessary to complete the handle of the 'cup and handle' pattern (4h chart).

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