Cup and handle
The cup and handle formation (also called the cup with handle formation) is a bullish chart pattern that is defined by a chart where a stock drops in value, then rises back up to the original value, then drops a small amount in value, and then rises a small amount in value.
Important characteristics
- Trend: A cup and handle formation should follow an increase trend, ideally one that is only a few months old. The older the increase trend, the less likely it is that the cup and handle will be an accurate indicator.
- Shape: In a cup and handle formation, the cup must always precede the handle. The cup should form a rounded bowl shape, with an obvious bottom. A V-shaped bowl is said to be avoided. The cup should be fairly shallow, and ideally should retrace about 30% to 50% of the previous increase.[1] The perfect pattern would have equal highs on either side of the cup, but this is not always the case.
- Duration: The cup should last 1 to 6 months, while the handle should only last for 1 to 4 weeks.[1] These are only approximate values, however; a cup may last anywhere from a few weeks to a few years.
- Volume: The volume of the stock should decrease along with the price during the cup and should increase rapidly near the end of the handle when the price begins to rise.[1]
Significance for traders
A cup and handle formation is considered to be a bullish signal, and is usually followed by a sharp rise in value. A rather accurate estimation of the expected price rise is found by measuring the price rise from the bottom of the cup to the right side.[1] The reason for a price rise following a cup and handle formation is largely unknown.
References
External links
- Analyzing Chart Patterns: Cup And Handle at investopedia.com