Cup and Handle Formation
Cup and Handle Pattern
The cup and handle pattern is a bullish continuation formation. This pattern is one of the newer chart formations and can be easily spotted on a price chart. The formation was first popularized by William O'Neil in his 1988 book, How to Make Money in Stocks. In order for the cup and handle setup to have the highest odds of succeeding, it should come after a clear uptrend is in place. The chart pattern consists of two key components: (1) cup and (2) handle.
After a new high is set with an increase in volume, the asset will then begin an extended pullback. This pullback will occur on light volume and create a rounding bottom. Relative to the time it took to make the first high, the rounding bottom will take three to four times in duration to complete. Throughout this bottoming process, you will notice that the volume will diminish. In order for the odds of the cup and handle to be in your favor, the cup should not retrace more than 50% of the prior up move. There are times that the formation will work with retracements of 61.8% or greater, but the odds are no longer in your favor. Once this intermediary low is in, the asset will begin to rally back up to the last swing high, only to fail at the retest level.
The handle begins to form after the failed retest of the swing high. The asset will then retrace roughly 38.2% to 50% of the cup. The smaller the retracement, the greater odds of success. Once the handle completes this minor correction, it will then breakout above the two recent swing highs, with an increase in volume. The target of the cup and handle formation is calculated by adding the depth of the cup to the breakout level.
Cup and Handle Chart Example
The below example is from Sirius Satellite Radio in late '04. Notice how the cup and handle called for the massive breakout, too bad the public had to wait until Howard Stern announced he was coming over to satellite before they were able recognize the strength in the stock.