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🟨 Cup and Handle Pattern - cheat sheet

What is the Cup and Handle Pattern?

One of the most important chart patterns in the stock market is the Cup and Handle Pattern, invented by William O’Neill. Sometimes you might see it abbreviated as CWH. It also holds the crowd proclaimed title as one of the most profitable and reliable breakout patterns. The Cup and Handle Pattern forms as a bullish continuation pattern that can be found during strong trend.

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Is Cup and Handle Pattern Bullish?

William O'Neil cup and handle patterns represent bullish continuation patterns that mark consolidation periods which are followed by breakouts. This pattern includes two components: cup and handle . After advancing, this cup is formed in a bowl shape or with a rounded bottom. Handle forms in the upper third of the cup.

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Stages of a Cup and Handle Pattern Formation

Stage 1 Setup:

The pattern starts when a price raises from a former base, making the prior trend a bullish trend. At some the profit taking starts taking place and the stock begins the decline, forming the high of the cup. The high of the cup is also called the ‘Left Cup’

Stage 2: Decline:
The stock starts to form a new base. It is normal to see above average volume at the beginning of the decline. The volume element is important since it ensures that later buyers to the party are out of the stock and do not provide an overhead supply. By the end of Stage 2 the volume would have fallen below average. This low trading volume is combined with price consolidation around the low of the cup.

Stage 3 Recovery:
The stock starts to recover and the volume on up days starts to pick up. This indicates that institutions are taking interest in the stock. Pro tip: look for low volume on down days. Now we still have a few more types of players into the stock: the bottom fishers who bought in at the low of the cup and the bag holders who have bought at the high of the cup and have been sitting on a loss. As the stock price moves up, these would partially close their positions making the recovery process a stair stepping process rather than a V shaped recovery. As the price reaches close to the High of the cup, the last bag-holders will cut their losses and will create a large volume sell-off. At this point the “Pivot” is formed or the “High of the Handle”.

Stage 4 Consolidation:
After the High of the handle, the price is likely to continue its handle formation. The handle pattern occurs as there are still weak hands in the ticker. A shakeout preferably on higher volume is considered a bullish continuation in the cup and handle pattern formation . This indicates that all overhead supply is depleted. The point when the price starts to climb again and reaches the high of the handle is the breakout point. We will look for a to price breaks on higher volume to indicate that institutions have taken control of the stock and that the sky is clear to move upwards. A rule of thumb is to look for a price target with the same value as the prior advance from previous base as the one subsequent to Stage 1.

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Hope this helps!

Example of Cup and Handle on AAPL from 2003
https://www.tradingview.com/x/fyibg5zB/

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