Technical Analysis: Cup and Handle

Cup and Handle
by Richard N. Dettling

Of all the chart patterns that signal a reversal in trend, the “cup and handle” is becoming the most popular in spotting these reversals. It is a chart pattern that often stands out from the others and is easily found when viewing a multitude of charts and trying to decipher a chart pattern out of them. Experienced Technical Analysts look for this type of chart pattern because it produces good breakouts to signal a bullish rally.

The majority of the greatest stock winners have traced this pattern. As the name implies, the cup with handle pattern resembles the profile of a tea cup with a handle on the right side. The cup is in the shape of a "U". The handle is a drop in prices after the right side of the lip of the cup has been reached. The handle can have a variety of shapes and can consist of double handles and high handles.



If you look at the stock's chart with a bit of "artistic expression," it forms a bowl shape or "cup." When the right side of the cup reaches a level even with the left side "rim" the stock is back at it's resistance level. At this point, one of two things will happen. The stock will either power through the resistance level and break out to a new high, or it will bounce off that resistance and move lower. Unfortunately, cup-and-handle formations rarely look perfect on a chart. You sometimes have to stretch your imagination a bit to see the formations. A cup may only take a month to form, while other times it takes three. Some cups are formed over 12 months, and the handle is formed in three months. A handle may drop back to almost midway between support and resistance, or it may back up only a few points. Sometimes the right-side rim will be higher than the left-side rim, giving the formation the appearance of the letter "J." It will take a while to consistently find these patterns, but if you stick with it, you will indeed be able to spot them.


Volume is usually light in forming the right side of the cup. Selling pressure is typically present as those investors who bought into the security as the left side peak occurred, sell into the rising trend of the right side of the cup and this often leads to the formation of the handle. When the enthusiasm of selling during the formation of the handle translates into price, there is evidence for the success or failure of the resulting trend after the handle is fully formed. Light selling during the handle formation leads to a greater potential for higher prices after the cup and handle formation is complete A breakout from the handle formation is usually accompanied by rising volume and is a positive sign for a continuation of the trend in the direction of the breakout.

Often we see a variation of the cup-and-handle, and that we call the cup-and-'double'-handle. The pattern has formed the cup-and-handle, but again the stock is repelled at the resistance line and falls. At that point there is a cup, a pullback, a run-up (cup-and-handle) and then another pullback. If this pullback falls only as far as the first pullback and starts back up, another handle is forming. By the time the second handle reaches the resistance level that formed the front of the cup, the rear of the cup and the first handle, there is great upward pressure on the stock. There are now three "tops," and if the stock can push up through those tops there is often a very nice move as shorts cover and new buyers flood in.

The cup and handle formation is uncommon and forms over various time spans. Market activity should never be taken for granted as there is much variety in the psychological settings, economic trends and fundamentals that produce price action on the market. This is my disclaimer, the market does not always do what you think it ought to do and as I always continue to purport, “the likelihood of a pattern or trend to follow through will depend on stock volume and index trend.” So always confirm your thesis.