The cup and handle is a versatile chart pattern. Typically, it's viewed as a reversal pattern, signifying the end of a downtrend. It can also be a continuation pattern, though, or signal the end of an uptrend. The pattern is created when the price falls (left side of the cup), levels off (bottom of cup) and then rallies back to the point it declined from (right side of the cup). The "handle" is created by a small pullback, less than half the size of the cup. The handle is often a range or small trend channel. Traders view a breakout above the handle as a signal to buy. The same pattern can also be a signal to sell, when the cup and handle is upside down (inverse). Here are some cup and handle patterns forming right now.
Columbia Pipeline Group, Inc. (CPGX) is forming a cup and handle bottom. This example shows the flexibility of the pattern—the chart doesn't need to look exactly like a cup. For the bottoming process there just needs to be a major move lower, followed by a rally of equal magnitude. Columbia Pipeline started a major decline in January from near $20, bottomed at $15.39 and $15.46 (double bottom) and has since rallied back to $20. As of March 9, the handle is forming. A rally above $20 could be a signal the advance is continuing, although, the handle on patterns of this size are often a bit larger. Therefore, a drop to approximately $18 is quite possible, as the handle continues to form. If the price does break above the handle, then the approximate target for the advance is the height of the cup added to the top of the cup. Using rounded numbers: $20 - $15.50 = $4.50. The target if the price breaks higher is, therefore, $24.50 ($20 + $4.50).
Chubb Ltd. (CB) is forming a continuation cup and handle pattern. It occurs when the price is near a high, declines, and then rallies back to the starting point of the decline (or close to it). For it to be a cup and handle, a handle must then form. If the price breaks above the handle, it signals the stock is likely to continue rising. Chubb peaked at $119.86, twice, with a decline to $106.82 in between. Since mid-February, the price has been hovering near the top of the cup (handle). If the price rallies above $119.86, the approximate price target is $132.
American States Water Co. (AWR) is forming an inverted cup and handle. The stock rallied strongly in late January but then fell equally as hard in late February. The launch began at $41.40, on January 28. Between $41 and $42 is where the decline has stalled out as well. The high reached in the middle was $47.24, creating a pattern approximately $5.50 in height (rounded down). Expect a larger handle to form on this chart. The March fluctuations between $41 and $42 are likely just the start of a handle which could see the price pullback into the $43 to $44 price area. Keep this stock on the radar, though. That was a very strong decline, which has shifted the bias to the downside. The handle forming and pushing the price back up to the $43 to $44 region will attract a lot of sellers who didn't get out on the rapid decline. If that handle forms, and breaks to the downside, the target is $36. $36 is a support area from mid-2015.
The Bottom Line
These are early-stage patterns, where the handle is just starting to form. Allow the handle to form for several more days, or at least until trendlines can be drawn on it to show a potential breakout point. It's important to have stocks like this on the radar now, though, that way you can trade the breakout when it occurs. Scanning for, or hearing about, a breakout after the fact means being late to the party. Columbia Pipeline and Chubb are both knocking at resistance, and a breakout could occur at any time. American States Water is a choppier stock, and therefore, the handle may take a couple of weeks to form. When it does, though, there's potentially another move to the downside coming.