Cup and Handle

The cup and handle is a bullish continuation pattern popularised by William O'Neil in his 1988 book How to Make Money in Stocks. It looks like a teacup in profile: a rounded, U shaped base (the cup) followed by a smaller, shallow pullback (the handle). When price breaks above the handle's high, the pattern signals that the prior uptrend is resuming.

Anatomy#

A V shaped cup, a very deep cup or a handle that drops into the lower half of the cup are all weaker versions.

What the pattern shows#

The cup reflects a correction that slowly shakes out weaker holders and turns from selling to buying, much like a rounding bottom. As price approaches the old high, some holders who bought near the top sell to break even, causing the handle. That small, quiet pullback absorbs the last supply. When price clears the handle, little overhead selling remains. See Rounding Bottom.

Trading the pattern#

1. Confirm the prior uptrend and a well formed, rounded cup.
2. Mark the handle's high: this is the classic buy point.
3. Entry: a buy stop just above the handle high, or a close above it on strong volume.
4. Stop: below the handle's low. O'Neil's method also used a fixed maximum loss of about 7% to 8% from the buy point.
5. Target: the cup's depth added to the breakout point is a common guide; many traders trail stops instead.

What makes a stronger setup#

• A shallow, orderly handle on declining volume.
• A breakout on clearly rising volume. See Volume Analysis Basics.
• A broad market in an uptrend; most breakouts fail in falling markets.
• Strong fundamentals, in O'Neil's original approach, such as rising earnings.

Failures and how to handle them#

The most common failure is a breakout that stalls and falls back into the handle. If price closes back below the handle's low, the pattern has failed. Exit quickly; failed breakouts can turn into sharp declines as recent buyers sell. See Failed Breakouts and False Breaks.

Inverted cup and handle#

The bearish mirror image, an inverted cup and handle, forms in downtrends: a rounded top, a small upward handle, and a breakdown below the handle low. It is less commonly traded but follows the same logic in reverse.

Common mistakes#

• Buying in the handle before the breakout, without a reason to expect a turn.
• Accepting deep or messy handles that signal weakness.
• Ignoring the market trend.
• Holding a failed breakout in the hope it recovers.

Frequently asked questions#

Is the cup and handle pattern bullish?#

Yes. It is a bullish continuation pattern that signals the prior uptrend may resume when price breaks above the handle.

Where is the buy point in a cup and handle?#

Traditionally just above the high of the handle, ideally on strong volume.

How long does a cup and handle take to form?#

On daily charts, the cup often takes several weeks to months and the handle one to a few weeks.

Sources#

• Wikipedia, Cup and handle