Educational 15: Cup & Handle (Continuation Pattern)

The Cup & Handle pattern is one the most common and favorite patterns among the traders. It is another time-tested pattern that has created valuable gains for traders and investors. It is known as a bullish continuation pattern and resembles the shape of a tea cup on a chart.

Plot: First, it's important that there is an upward trend before the formation of the cup and handle. In general, the larger the prior trend is, the lower the potential for a large breakout after the pattern has been completed.

Reason of the Shape: The reason is that a cup-and-handle pattern is a signal of consolidation within a trend, where the weaker investors leave the market and new buyers and prior holders stay in the market. If the shape of the cup is too sharp or V-Shape (or quick), it is not considered a true consolidation phase in the upward trend and thus weakens the potential trade signal.

Cup: A cup formation happens when the price moving in an uptrend shows a pullback followed by a consolidation period which makes the bottom of the cup and finally the reverse back to upside continuing the uptrend. Bottom of a cup serves as support for the pattern as shown in above chart. Usually the pattern looks like a 'U' to round bottom. The cup should be considered reliable only when it is less than half percentage of the preceding trend. The deeper the 'U' or round shape the reliable the pattern is.

Handle: The handle is the downward move after the upward move on the right side of the cup. During this downward move, a descending trendline can be drawn, which forms the signal for the breakout. A move above this descending trendline is a signal that the prior upward trend is set to begin.

Major Breakouts: 1. Descending/Downward Trend line or Resistance of the Handle
2. The price point of the two peaks in the cup

Thank you for your continuous support and appreciation,

Neetesh Jain


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