What Is a Cup and Handle Pattern?
Let me tell you about the cup and handle pattern—it's a bullish continuation pattern that I use to spot potential buying opportunities on price charts. It looks like a U-shaped cup with a downward-sloping handle attached. This pattern was popularized by technician William J. O'Neil in his book How to Make Money in Stocks, and it's often discussed in Investor's Business Daily. You can expect it to form over seven to 65 weeks, and once the handle's resistance breaks, it often leads to significant upward price movement.
Insights and Implications of the Cup and Handle Pattern
William J. O'Neil defined this pattern back in 1988, including specific time frames and the rounded lows that make it look like a teacup. When a stock tests old highs, it might face selling pressure, creating a brief downtrend before pushing higher—this is where the cup forms, followed by the handle. I recommend looking for longer, U-shaped bottoms for stronger signals, avoiding sharp V-shapes. Keep the cup's depth reasonable, and watch for handles in the top half of the pattern. Volume should drop during the decline and rise on the upmove back to test highs. Remember, the handle doesn't have to hit the exact previous high, but a stronger breakout might be needed if it's farther away.
Trading Strategies for the Cup and Handle Pattern
When trading this pattern, focus on going long. You can place a stop buy order just above the handle's upper trend line—execute only if the price breaks resistance, though watch for slippage on aggressive entries. Alternatively, wait for a close above the trend line and set a limit order below the breakout for any pullback, but you risk missing the move if it doesn't retrace. To find your profit target, measure the distance from the cup's bottom to the breakout level and add that upward from the handle. Set stop-losses below the handle or cup based on your risk tolerance.
Real-World Trading Example: Cup and Handle Pattern
Take Wynn Resorts (WYNN) as an example—it went public at around $13 in 2002 and climbed to $154 by 2007. It then declined close to the IPO price, forming a shallow cup that met O'Neil's criteria. The recovery hit the prior high in 2011, and the handle pulled back to the 50% retracement with a rounded shape. In October 2013, it broke out and gained 90 points in five months. This shows how a solid cup and handle can lead to big moves when confirmed.
Understanding the Limitations of the Cup and Handle Pattern
Don't rely on this pattern alone—combine it with other indicators. It can take a long time to form, from one month to over a year, leading to delayed decisions. Cup depth varies; shallow ones might signal, but deep ones can give false positives. Sometimes there's no handle, or it fails in illiquid stocks. Always confirm before trading.
Cup and Handle FAQs
You might wonder what this pattern indicates—it's a cup followed by a downward handle signaling a buy opportunity, with the security potentially reversing to new highs over seven weeks to a year. To spot it, look for a stock that hits a high, corrects 50%, rebounds to test resistance, trends sideways, then breaks out 50% higher. If confirmed, expect a sharp short- to medium-term increase; if it fails, the bull run won't happen. The target is the cup's height added to the handle's breakout point, making it a bullish uptrend extender. O'Neil outlined four stages: a new high, a retrace up to 50% forming the cup, a rebound and decline for the handle, then a breakout matching the cup's depth.
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