Cup and Handle Continuation

<<<<<<< HEAD

Another Perspective...

Overview
The Cup with Handle is a bullish continuation pattern that marks a consolidation period followed by a breakout. As its name implies, there are two parts to the pattern: the cup and the handle. The cup forms after an advance and looks like a bowl or rounding bottom. As the cup is completed, a trading range develops on the right hand side and the handle is formed. A subsequent breakout from the handle's trading range signals a continuation of the prior advance.The Cup With Handle is a rally to a new high, a decline of 1/3 to 2/3 of the previous trend over 8 - 12 weeks, a rally reaching the previous high or falling just short of the new high level, a second decline of 8 - 20 percent over 1 - 4 weeks followed by a breakout to fresh new highs on strong volume.

The Trading Target
The technical target for a cup with handle pattern is derived by adding the height of the "cup" portion of the pattern to the eventual breakout from the "handle" portion of the pattern.

The Cup and Handle Continuation

Validity of the Pattern
Volume on the break of the handle and break of the rim's resistance confirms the pattern. Upside breakouts often lead to small 2-3% rallies followed by an immediate test of the breakout level. If the stock closes below this level (now support) for any reason the pattern becomes invalid.

Similarity to other Chart Patterns?
Like most technical patterns, the Cup With Handle pattern is really little more than a variation of another technical pattern. In this case that pattern is the Double Top. The pattern begins after a well-liked stock rallies to a new high following a positive fundamental development. As the stock surges investors feel increasingly comfortable paying higher prices but there comes a point when the "story" of the stock fails to convert new believers. Slowly, the stock begins to drift lower as those seeking to lock-in profits outnumber those intrigued by the story. Although most of the fundamental news is still positive, many investors begin to question if the stock really is worth the prevailing market price and over time a substantial decline begins. This process creates an important technical peak.

Key Features
1. Trend: To qualify as a continuation pattern, a prior trend should exist. Ideally, the trend should be a few months old and not too mature. The more mature the trend, the less chance that the pattern marks a continuation or the less upside potential.

2. Cup: The cup should be "U" shaped and resemble a bowl or rounding bottom. A "V" shaped bottom would be considered too sharp of a reversal to qualify. The softer "U" shape ensures that the cup is a consolidation pattern with valid support at the bottom of the "U". The perfect pattern would have equal highs on both sides of the cup, but this is not always the case.

3. Cup Depth: Ideally, the depth of the cup should retrace 1/3 or less of the previous advance. However, with volatile markets and over-reactions, the retracement could range from 1/3 to 1/2. In extreme situations, the maximum retracement could be 2/3.

4. Handle: After the high forms on the right side of the cup, there is a pullback that forms the handle. Sometimes this handle resembles a flag or pennant that slopes downward, other times just a short pullback. The handle represents the final consolidation/pullback before the big breakout and can retrace up to 1/3 of the cup's advance, but usually not more. The smaller the retracement is, 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.

5. Duration: 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 1-4 weeks.

6. Volume: There should be a substantial increase in volume on the breakout above the handle's resistance.

7. Target: 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. A cup retracement of 62% may not fit the pattern requirements, but a particular stock's pattern may still capture the essence of the Cup with Handle.

Written by TheArabSmith
Introduction

The cup and handle is a bullish continuation pattern, where the cup and handle occur within an up trend - It can be seen as a consolidation within that trend prior to a continuation.  The handle of the cup is a consolidation of the consolidation – an upward trend in the cup pauses then continues after the handle. This pattern can take several months to form, but whatever the timeframe the pattern generally means the same thing – a continuation of trend. The inverted Cup and handle is a bearish continuation and follows the same rules as above, but in a down trend.

The cup and handle isn’t a very common pattern and you’ll spend an age trying to find the perfect chart. Basically if you think you’ve found a cup and handle in an up trend (or inverted cup and handle in a downtrend) then the retracement to the bottom of the cup should be between 33% and 66% (see Fibonacci retracement) of the proceeding trend and the cup should be rounded, rather than v shaped. The handle should form on the cups up trend, near the rim and should retrace to a smaller extend against the larger trend – no more than 30% of cup height. A good example of the cup and handle can be seen in our daily chart of BRLI below.

Key Features

Technically the Cup and Handle follows this pattern:
  • A prior trend must be in place.
  • This trend has a consolidation retracement called the Cup. (see Fibonacci retracement in later modules)
  • Retracement of the cup should be 33-66% of prior trend
  • A second smaller rally after the retracement testing the previous high and meeting resistance for a second time
  • A smaller consolidation of the second rally forming the handle
  • Handle retracement no more than 30% of cup height
  • A breakout. 
  • Volume should decline during the patterns initial formation, increase as price climbs the cups right hand wall, decrease into the handle then spike on the handle break
A Cup and Handle Working Example

Take a look at the BRLI chart below.  After the first peak in August there is a sell off to take profits etc.…, but no major capitulation (selling volume should be small. If we see large volume on sell-off there could be a reversal with price moving south). Buyers slowly re-enter at technical support levels indicated by Fibonacci retracements, historical technical levels or moving average support etc.. Eventually the previous resistance level is reached in November, but there’s no will to breach this level, so once again there’s a consolidation. This is an important part of the pattern.  If there was large volume on this sell off, we may be looking at a double top and continued down momentum, but if volume is small a consolidation is more likely (see section reversal or retracement). Bulls take hold and break out of the handle resistance in mid November (maybe stimulated by fundamentals) and make to break resistance levels set by the top of the cup (which is a stronger breakout signal). Volume is extremely important here.  If we have large volume on the breakout then further up side is expected. If resistance isn't immediately broken then the pattern has a good chance of becoming invalid.

BRLI - Cup and Handle Continuation Example

Trading The Cup and Handle

In our BRLI example you’ll see where new highs of 3.1/3.2 are tested in Aug and Nov.  There's a 60% consolidation decline to 1.5 against the previous trend, then a new rally to the previously tested highs.  A 2nd consolidation then takes place forming the handle, which should be no more than 30% of the cups height.  Entry to the trade could have occurred at this handle breakout (2.85), but a more conservative entry level would have been on cup line resistance (3.2), or even sometime thereafter if you're more conservative.  Entering after the top resistance line has been broken is further confirmation that the trend is continuing.  Adding the cup height to the resistance breakout derives our technical target.
  • Target price = Cup height (3.2 - 1.5 = 1.7) added to the cup rim (3.2) = 4.9 
  • Entry on top resistance break-out = 3.2
  • Potential profit = 1.7
  • stop loss placed just under the handle support = 2.25
  • Potential loss = 3.2 - 2.25 = 0.95
  • Profit to Loss Ratio = 1.7:0.95 = 1.8:1
This level can take a long time to achieve and as you can see 4 was only achieved here. This 4 level may have been an important historical resistance level, so be vigilant about these previous levels as price targets may not be reached.  In fact the target of 4.9 wasn't reached until April 2002.

The Inverted Cup and Handle

Inverted Cup and Handle

The inverted Cup and Handle is a bearish continuation and follows the same rules as the Bullish cup and handle, but in a down trend. I've placed the chart example above for reference only, so follow all the rules for the Cup and Handle, just mirror them over the horizontal.

The Psychological Story

As the stock nears the bottom of it's decline from the recent highs (this decline could reach fifty percent in bear markets) buyers begin to reassert themselves and the stock stabilizes and a reaction low occurs. From this point forward, the bias begins to tilt gradually higher. During this phase the stock may be the subject of positive Wall Street analyst comments, a new product announcement or legal victory. As the rally gains steam sentiment improves dramatically and new buyers begin to talk about certain new highs but those that purchased the stock at or near top #1 get ready to sell. These investors may have been waiting as long at 12 weeks for an opportunity to sell their positions without incurring a loss and they are not dissuaded by all of the new found bullish talk.

Just short of the old highs at the rim aggressive selling begins on no specific news but in reality some investors that bought near the top have already begun to sell. The stock begins to work lower on limited volume creating a second, well defined top. This large U-shaped pattern may look like a typical double top but for the purposes of this pattern, it is called the cup.

Noting key resistance at the cup's rim, speculators begin to initiate short positions. From a technical perspective, this is a very important part of the pattern. If the stock gains downside momentum and volume continues to increase, this could very easily become a double top but as the price works lower, volume slows, sellers seem to be losing the upper hand. At this point more positive fundamental news is released and the stock price rallies. With selling pressures satiated and the flow of fundamental news decidedly bullish volume increases dramatically and the stock works toward a fresh new high.

This very small U-shaped pullback is called the handle.

Speculators become frantic, they must cover short positions (buying the same type and number of securities that were sold short) to cut losses but the supply of stock for sale has been significantly curtailed because investors that bought at the top have liquidated positions. The next session Wall Street analysts make positive comments and the stock surges to a new high on dramatically increased volume. Weeks later the stock trades at substantial new highs.

To Sum Up

It is important to note that Cup and handle patterns, are highly subjective and need other technical analysis to figure them out.  The key to profiting is accurately identifying and exploiting these trends in real time, which can be more difficult than it sounds. As a result, it is wise to trade this technique with a practice account - as it is any new technique you are learning - before going live. And, remember to use stop/loss to limit your losses.  As with the above trading example, even though the market price went higher, it took several months to reach the target.  A judgement call needs to be made on whether to continue the trade, or sell it.

Technical analysis is not an exact science and although these indicators and patterns can increase the probability of making the correct trade, many will go against you and large losses can be incurred. Your own trading strategy needs to be formed and hopefully you'll be on your way to achieving this on completion of this course.

=======

Another Perspective...

Overview
The Cup with Handle is a bullish continuation pattern that marks a consolidation period followed by a breakout. As its name implies, there are two parts to the pattern: the cup and the handle. The cup forms after an advance and looks like a bowl or rounding bottom. As the cup is completed, a trading range develops on the right hand side and the handle is formed. A subsequent breakout from the handle's trading range signals a continuation of the prior advance.The Cup With Handle is a rally to a new high, a decline of 1/3 to 2/3 of the previous trend over 8 - 12 weeks, a rally reaching the previous high or falling just short of the new high level, a second decline of 8 - 20 percent over 1 - 4 weeks followed by a breakout to fresh new highs on strong volume.

The Trading Target
The technical target for a cup with handle pattern is derived by adding the height of the "cup" portion of the pattern to the eventual breakout from the "handle" portion of the pattern.

The Cup and Handle Continuation

Validity of the Pattern
Volume on the break of the handle and break of the rim's resistance confirms the pattern. Upside breakouts often lead to small 2-3% rallies followed by an immediate test of the breakout level. If the stock closes below this level (now support) for any reason the pattern becomes invalid.

Similarity to other Chart Patterns?
Like most technical patterns, the Cup With Handle pattern is really little more than a variation of another technical pattern. In this case that pattern is the Double Top. The pattern begins after a well-liked stock rallies to a new high following a positive fundamental development. As the stock surges investors feel increasingly comfortable paying higher prices but there comes a point when the "story" of the stock fails to convert new believers. Slowly, the stock begins to drift lower as those seeking to lock-in profits outnumber those intrigued by the story. Although most of the fundamental news is still positive, many investors begin to question if the stock really is worth the prevailing market price and over time a substantial decline begins. This process creates an important technical peak.

Key Features
1. Trend: To qualify as a continuation pattern, a prior trend should exist. Ideally, the trend should be a few months old and not too mature. The more mature the trend, the less chance that the pattern marks a continuation or the less upside potential.

2. Cup: The cup should be "U" shaped and resemble a bowl or rounding bottom. A "V" shaped bottom would be considered too sharp of a reversal to qualify. The softer "U" shape ensures that the cup is a consolidation pattern with valid support at the bottom of the "U". The perfect pattern would have equal highs on both sides of the cup, but this is not always the case.

3. Cup Depth: Ideally, the depth of the cup should retrace 1/3 or less of the previous advance. However, with volatile markets and over-reactions, the retracement could range from 1/3 to 1/2. In extreme situations, the maximum retracement could be 2/3.

4. Handle: After the high forms on the right side of the cup, there is a pullback that forms the handle. Sometimes this handle resembles a flag or pennant that slopes downward, other times just a short pullback. The handle represents the final consolidation/pullback before the big breakout and can retrace up to 1/3 of the cup's advance, but usually not more. The smaller the retracement is, 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.

5. Duration: 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 1-4 weeks.

6. Volume: There should be a substantial increase in volume on the breakout above the handle's resistance.

7. Target: 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. A cup retracement of 62% may not fit the pattern requirements, but a particular stock's pattern may still capture the essence of the Cup with Handle.

Written by TheArabSmith
Introduction

The cup and handle is a bullish continuation pattern, where the cup and handle occur within an up trend - It can be seen as a consolidation within that trend prior to a continuation.  The handle of the cup is a consolidation of the consolidation – an upward trend in the cup pauses then continues after the handle. This pattern can take several months to form, but whatever the timeframe the pattern generally means the same thing – a continuation of trend. The inverted Cup and handle is a bearish continuation and follows the same rules as above, but in a down trend.

The cup and handle isn’t a very common pattern and you’ll spend an age trying to find the perfect chart. Basically if you think you’ve found a cup and handle in an up trend (or inverted cup and handle in a downtrend) then the retracement to the bottom of the cup should be between 33% and 66% (see Fibonacci retracement) of the proceeding trend and the cup should be rounded, rather than v shaped. The handle should form on the cups up trend, near the rim and should retrace to a smaller extend against the larger trend – no more than 30% of cup height. A good example of the cup and handle can be seen in our daily chart of BRLI below.

Key Features

Technically the Cup and Handle follows this pattern:
  • A prior trend must be in place.
  • This trend has a consolidation retracement called the Cup. (see Fibonacci retracement in later modules)
  • Retracement of the cup should be 33-66% of prior trend
  • A second smaller rally after the retracement testing the previous high and meeting resistance for a second time
  • A smaller consolidation of the second rally forming the handle
  • Handle retracement no more than 30% of cup height
  • A breakout. 
  • Volume should decline during the patterns initial formation, increase as price climbs the cups right hand wall, decrease into the handle then spike on the handle break
A Cup and Handle Working Example

Take a look at the BRLI chart below.  After the first peak in August there is a sell off to take profits etc.…, but no major capitulation (selling volume should be small. If we see large volume on sell-off there could be a reversal with price moving south). Buyers slowly re-enter at technical support levels indicated by Fibonacci retracements, historical technical levels or moving average support etc.. Eventually the previous resistance level is reached in November, but there’s no will to breach this level, so once again there’s a consolidation. This is an important part of the pattern.  If there was large volume on this sell off, we may be looking at a double top and continued down momentum, but if volume is small a consolidation is more likely (see section reversal or retracement). Bulls take hold and break out of the handle resistance in mid November (maybe stimulated by fundamentals) and make to break resistance levels set by the top of the cup (which is a stronger breakout signal). Volume is extremely important here.  If we have large volume on the breakout then further up side is expected. If resistance isn't immediately broken then the pattern has a good chance of becoming invalid.

BRLI - Cup and Handle Continuation Example

Trading The Cup and Handle

In our BRLI example you’ll see where new highs of 3.1/3.2 are tested in Aug and Nov.  There's a 60% consolidation decline to 1.5 against the previous trend, then a new rally to the previously tested highs.  A 2nd consolidation then takes place forming the handle, which should be no more than 30% of the cups height.  Entry to the trade could have occurred at this handle breakout (2.85), but a more conservative entry level would have been on cup line resistance (3.2), or even sometime thereafter if you're more conservative.  Entering after the top resistance line has been broken is further confirmation that the trend is continuing.  Adding the cup height to the resistance breakout derives our technical target.
  • Target price = Cup height (3.2 - 1.5 = 1.7) added to the cup rim (3.2) = 4.9 
  • Entry on top resistance break-out = 3.2
  • Potential profit = 1.7
  • stop loss placed just under the handle support = 2.25
  • Potential loss = 3.2 - 2.25 = 0.95
  • Profit to Loss Ratio = 1.7:0.95 = 1.8:1
This level can take a long time to achieve and as you can see 4 was only achieved here. This 4 level may have been an important historical resistance level, so be vigilant about these previous levels as price targets may not be reached.  In fact the target of 4.9 wasn't reached until April 2002.

The Inverted Cup and Handle

Inverted Cup and Handle

The inverted Cup and Handle is a bearish continuation and follows the same rules as the Bullish cup and handle, but in a down trend. I've placed the chart example above for reference only, so follow all the rules for the Cup and Handle, just mirror them over the horizontal.

The Psychological Story

As the stock nears the bottom of it's decline from the recent highs (this decline could reach fifty percent in bear markets) buyers begin to reassert themselves and the stock stabilizes and a reaction low occurs. From this point forward, the bias begins to tilt gradually higher. During this phase the stock may be the subject of positive Wall Street analyst comments, a new product announcement or legal victory. As the rally gains steam sentiment improves dramatically and new buyers begin to talk about certain new highs but those that purchased the stock at or near top #1 get ready to sell. These investors may have been waiting as long at 12 weeks for an opportunity to sell their positions without incurring a loss and they are not dissuaded by all of the new found bullish talk.

Just short of the old highs at the rim aggressive selling begins on no specific news but in reality some investors that bought near the top have already begun to sell. The stock begins to work lower on limited volume creating a second, well defined top. This large U-shaped pattern may look like a typical double top but for the purposes of this pattern, it is called the cup.

Noting key resistance at the cup's rim, speculators begin to initiate short positions. From a technical perspective, this is a very important part of the pattern. If the stock gains downside momentum and volume continues to increase, this could very easily become a double top but as the price works lower, volume slows, sellers seem to be losing the upper hand. At this point more positive fundamental news is released and the stock price rallies. With selling pressures satiated and the flow of fundamental news decidedly bullish volume increases dramatically and the stock works toward a fresh new high.

This very small U-shaped pullback is called the handle.

Speculators become frantic, they must cover short positions (buying the same type and number of securities that were sold short) to cut losses but the supply of stock for sale has been significantly curtailed because investors that bought at the top have liquidated positions. The next session Wall Street analysts make positive comments and the stock surges to a new high on dramatically increased volume. Weeks later the stock trades at substantial new highs.

To Sum Up

It is important to note that Cup and handle patterns, are highly subjective and need other technical analysis to figure them out.  The key to profiting is accurately identifying and exploiting these trends in real time, which can be more difficult than it sounds. As a result, it is wise to trade this technique with a practice account - as it is any new technique you are learning - before going live. And, remember to use stop/loss to limit your losses.  As with the above trading example, even though the market price went higher, it took several months to reach the target.  A judgement call needs to be made on whether to continue the trade, or sell it.

Technical analysis is not an exact science and although these indicators and patterns can increase the probability of making the correct trade, many will go against you and large losses can be incurred. Your own trading strategy needs to be formed and hopefully you'll be on your way to achieving this on completion of this course.

>>>>>>> c0fd65f8ac5b5830dc3df1d307fcababd602b3a9
Comments