by Amanda Harvey
What is the Formation of a Cup and Handle Pattern?
A cup and handle is a chart pattern which is formed by a decline and then subsequent rise in price back to the original level. This forms the ‘cup’ of the pattern. The price then undergoes a lesser fall and rise, creating the ‘handle’ of the chart pattern.
The shape of the cup is generally fairly shallow, showing a moderate and not dramatic drop in price, and has a flat base created by a period of sideways movement. The handle typically represents a recreation of somewhere between 30 and 50 percent of the movement which created the cup. While the duration of the pattern is typically from 3 to 6 months, the handle part of the formation will generally not exceed four weeks.
What Does the Cup-and-Handle Signal?
The cup-and-handle pattern is interpreted as a signal of bull market conditions, and may indicate the likelihood of further increases in price. This chart pattern is generally preceded by an upward movement in price which then declines into the beginning of the ‘cup’ formation. It then generally trades horizontally for a while, forming the base of the cup. When the price begins to move upward again, the pattern is emerging, and it will then be completed by a smaller-scale repeat of the down and upward movement, thereby adding the handle and concluding the pattern.
What Factors Influence the Validity of the Pattern?
Whether there was an upward trend in progress prior to the formation of the cup-and-handle is a very important factor in the interpretation of the pattern. When there was a strong trend in progress before the pattern emerged, there is a fairly low probability of a major breakout following completion of the pattern.
The length of the preceding trend is also a significant consideration. When the trend is fairly new, it is more likely that the cup and handle will be an accurate indication of a further increase to follow.
When to Buy during a Cup-and-Handle Pattern
While the bottom of the cup formation is obviously the time when the prices are lowest, it is also impossible to know with any certainty that the price is indeed forming a cup and handle. The low point of the handle may present an appropriate time to buy, as the pattern is close to fully formed, and assuming that the expected increase will follow, this is a relatively low price at which to enter the trade. Some experts suggest that the best time to buy is when the handle begins moving up, as this is evidence that the pattern is completing.
An increase in volume during the formation of the handle can also provide confirmation that the pattern has the potential to continue into an upward trend.
The cup-and-handle pattern, which resembles a tea cup viewed from the side, is often a good indicator of an upcoming bullish trend in price, especially when following prior upward price movement.