1. Analyzing Chart Patterns: Introduction
  2. Analyzing Chart Patterns: Why Charts?
  3. Analyzing Chart Patterns: Head And Shoulders
  4. Analyzing Chart Patterns: Cup And Handle
  5. Analyzing Chart Patterns: Double Top And Double Bottom
  6. Analyzing Chart Patterns: Triangles
  7. Analyzing Chart Patterns: Flags And Pennants
  8. Analyzing Chart Patterns: The Wedge
  9. Analyzing Chart Patterns: Gaps
  10. Analyzing Chart Patterns: Triple Tops And Bottoms
  11. Analyzing Chart Patterns: Round Bottoms
  12. Analyzing Chart Patterns: Conclusion

The cup and handle is both a continuation and a reversal pattern. The reversal pattern marks the end of a downtrend, and shows the price transitioning into an uptrend. 

The continuation pattern occurs during an uptrend; a cup and handle forms, then the price continues its rise. 

The cup and handle is similar to a rounded bottom, except that with the cup and handle the price stalls near the breakout point and moves sideways or lower for a period of time. The U-shaped price action forms the cup, and the sideways or downside movement that follows creates the handle.

Reversal Pattern

In order for a cup and handle reversal to form, the price must first be falling. As with a rounded bottom, the price levels off and then begins to rise. Once it forms the cup, the price then must pause and either move sideways or move lower—this is the handle.

The handle usually moves in a channel, contained between two trendlines. During the handle, the price should not decline more than about 50% of the cup height. For example, if the bottom of the cup is $5, and the top of the cup is $6, the handle should form between $6 and $5.50. If the price drops more than 50% of the cup it could indicate that the selling is too strong, which means an immediate rise is less likely.

cup and handle reversal pattern

Since the price action of the handle is usually contained within a channel or between trendlines, take a long trade when the price moves up out of the channel/handle. Drawing the handle is subjective. Depending on how the trendlines are drawn, different traders will end up with different breakout points. 

Once a trade is taken, place a stop loss below the low point on the handle. This controls risk in the event the price keeps dropping instead of rallying. 

Price Target

A cup and handle reversal may indicate a long-term trend change. Long-term trends can last for years, therefore the reversal pattern doesn't have a long-term target. Typically, the longer the amount of time the cup and handle takes to form the bigger the rally that follows. 

For an estimated shorter-term target, or to establish a risk/reward for the trade, add the height of the pattern to the breakout point. This target assumes that the size of the rally within the cup will be replicated on the next rally. If indeed the long-term trend has reversed, the price should be able to reach this target, and potentially exceed it.

cup and handle reversal with stop loss and target

Continuation Pattern

The cup and handle continuation pattern has a similar setup to the reversal pattern, except the continuation patterns occurs within an uptrend. The price is moving higher, declines forming the U-shape and handle, then breaks out of the handle to the upside signaling the continuation of the uptrend.

As with the reversal pattern, the handle should not decline more than 50% of the way down the cup. Draw trendlines along the highs and lows of the prices within the handle. Enter long when the price breaks above the upper handle trendline.

Place a stop loss below the low of the handle. This controls the risk on the trade in case the price moves lower again. 

Price Target

Add the height of the cup to the breakout point on the handle. This provides an estimated target for the next advance.

cup and handle continuation pattern with stop loss and target

As discussed in the cup and handle reversal section, uptrends can last for years. The target represents a target for the next rally, but that target could be exceeded as the long-term uptrend unfolds.

Trading Considerations

The cup and handle continuation patterns has two positive factors working for it: an already established uptrend, and the pattern is showing the price starting to rise again following a pullback. The combination of these two factors make it a more reliable pattern than the cup and handle reversal. 

The reward on both the continuation and reversal patterns outweigh the risk, since the anticipated target is the height of the pattern, or more. The risk, on the other hand, is based on the size of the handle which is smaller than half the size of the cup. This makes the pattern an ideal trading candidate, as the potential reward is at least double the risk. 

Analyzing Chart Patterns: Double Top And Double Bottom
Related Articles
  1. Trading

    Monitor These Cup and Handle Chart Patterns (CPGX, CB)

    Various versions of the cup and handle playing out right, including reversal and continuation stock patterns.
  2. Trading

    New Approaches To The Old Cup And Handle

    Many cup and handle traders adhere strictly to O'Neil’s rules for construction, but there are many variations that produce reliable results.
  3. Trading

    Interpreting the Cup and Handle

    A cup and handle pattern on a bar chart shows a trend in upward performance that trades down and pauses before resuming its upward direction.
  4. Trading

    Stocks With More Upside Based on Price Action

    These stocks have rallied recently and could see further upside based on the price patterns that are playing out.
  5. Trading

    Is Now the Time to Buy Gold and Silver ETFs?

    Gold and silver stocks have pulled back recently after a move to upside. Is it time to buy? Here's the outlook.
  6. Trading

    Advanced Candlestick Patterns

    Go beyond the basics! Learn to identify and trade island reversals, kicker patterns and more.
  7. Trading

    Breakout Stocks to Watch Right Now

    These three stocks are near major breakout points, which will affect the short-term, and potentially the long-term direction of the stocks.
  8. Trading

    Three Momentum Stocks Breaking Out

    These stocks have been rallying aggressively, but after a brief pullback look poised to head even higher.
Frequently Asked Questions
  1. What's the difference between r-squared and adjusted r-squared?

    Learn how R-squared and adjusted R-squared values differ, how they are calculated and the relationship between them.
  2. What are some examples of ways that sensitivity analysis can be used?

    Understand the concept of sensitivity analysis and learn about the wide variety of disciplines to which it can be applied.
  3. Where can I find all of the stocks in the Dow Jones Industrial Average?

    The best place: the "Historical Components List" published on the official DJIA website.
  4. Are 401(k) contributions tax deductible?

    Find out what the tax advantages of a 401(k) retirement plan are. Learn what tax brackets gets the most benefit and why deferred ...
Trading Center