subject: The Cup and Handle [print this page] The Cup and Handle The Cup and Handle
Technically you have an extension of a bullish pattern; it marks a consolidation period then an accompanying breakout. The term cup and handle assumes there are two sections to the pattern.
The cup evolves after an advance, it appears like a bowl, the cup is completed, and a trading pattern develops that has a limited range. With time the handle is formed. The ensuing breakout from the handle's trading range indicates an extension of the previous run higher.
Why Does It Happen?
Like to the double top, the cup and handle acquires frequently with sensitive or popular stocks that have surged higher to a recent high following positive market sensitive information. As the share price uprises, the investor is contented in paying the higher market price but eventually the demand waivers and the stock price lingers lower, the experienced traders start to lock in their earnings. When the stock is affirmed by proficient central prospects, the investors starts to question the share price and its worth. The share confirms a top and a sell off begin (top 1).
The share price suffers a large drop of up to 20 percent from its latest high. If this situation occurred during a bear market losses could stretch up to 50 percent. Opportunistic investors and speculators try to pick the underside and procure into the stock, originally than most. The share price steadies and a reaction low are established. Interest in the stock grows and the share price rises. It procures several interests from the media, gets on the radar of various analysts and shortly after the research analysts represent convinced ideas to the market. A new rally begins to evolve, market sentiment improves and buyers who have held the stock since the recent high are getting ready to close out their trades. They have been held out of the market because they didn't want to lose on a trade; again pride has something to do with not exiting the trade earlier. They are not persuaded into holding their positions upon hearing new bullish reviews; they just want to move on.
As the stock price overtures the old high at top 1, the traders who bought in at the first new high begin to sell quickly, trying to protect their trading capital. A second top evolves which is well defined (top 2). This creates a significant U shaped pattern; as a result we have a CUP shaped pattern.
We now have a defining resistance high at top 1 and 2. The opportunists speculate the market and decide to short the stock. An interesting observation from a technical point of view of the pattern begins. There is a possibility that if stock prices fall dramatically and the volume of sellers increment, we could have a double top eventuate. But the volume subverts and the stock holders reign at this moment in time.
Shortly after the share price moves up convincingly on supporting news that the research houses release to the market. The stock price rallies to a new high as the short positions have to be covered along with new launch assurance; the influx of positive news is overwhelming. This has created a small U shaped pullback and is commonly known and the handle in this pattern. Short positions that were not covered earlier are now under pressure, the volume has increased on the positive news to the markets from the media and research houses and the share price is surging. Over the forthcoming weeks the stock now trades at substantially new highs.
Technical Signal
1. Trend: an established trend should be maintained in order to qualify as a continuation pattern. The trend should cover a number of months but not advance. The more mature the trend; the pattern will be misleading and not show any further potential.
2. Cup: the cup would preferably have a nice radius curve and resemble a bowl and have a rounded base. The smoother the bottom of the pattern the better the confirming support. The optimum pattern would have highs of equal support on both sides of the cup, although this is not always possible.
3. Cup Depth: Preferably, the retracement should be 1/3rd or lower than the recent high. In some situations where volatility is high, the retracement might be as much as 2/3rds. Generally in this extreme 2/3rds would be the utmost retracement.
4. Handle: following the second high, there is a nominal pullback that forms the handle. On occasions the handle gives the impression of a pennant or flag that falls away. Most handles are just a quick pullback. The handle portrays the final consolidation or pullback before a strong breakout rally to the upside. This can rally up to one third of the cup advance but generally never anymore. The smaller retracement, and the more aggressive the formation, the more important the breakout. It would be advisable at this stage to be cautious to wait for a break above the established resistance high of the cup.
5. Duration: the first phase being the cup design could take up to six months to launch, sometimes even longer on wider charts like weekly ones. The handle could develop from one week to about one month.
6. Volume: volume generally should be significant once the stock price breaks above the resistance high or handle's resistance.
7. Target: a good approximate of the relieved new stock price after the cup and handle, is calculated by measuring the distance from the second top (top 2) to the base of the cup. You then add this figure to the breakout point which will be the target.
