Cup and Handle Pattern

It was developed by William O Neil and was first discussed in his book “How to make money in stocks”.

Cup and Handle pattern is one of the most important chart patterns to make money in stock market.

The Cup is usually U-shape and the handle is basically the retracement from the prior top to about 1/3rd of the vertical height of the cup and looks quite similar to a bowl. This pattern simply shows a period of consolidation followed by a breakout.

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1.Cup

The Cup is usually “U” shaped and may be considered as a rounding bottom with almost equal highs on the either side. However, a “V” shaped cup also qualifies as a Cup and Handle pattern but the conviction is higher in “U” shaped due to the consolidation at the bottom.

2.Handle

The handle is usually the pullback from the higher end of the cup which may be rounding, triangle or a descending channel. Usually the pullback is about 1/3rd of the size of prior advance.

The smaller the pullback, better is the strength of the formation and higher the possibility of breakout.

3.Volume pattern

The breakout from the handle’s resistance should be accompanied with increased volume thus conforming the same.

4.Period

The cup usually forms over a period of 1-6 months or even longer those formed in weekly and monthly charts. The handle ideally forms over a span of 1-4 weeks or even higher depending upon the time period of cup.

5.Target

The projected target from the breakout is usually the vertical distance from the high to the bottom of the cup.

6. Stop loss

Traders may place stop loss at the lowest point of the handle and may trail it to recent swing low as the stock makes a higher high within the consolidation area of the handle; depending upon the risk appetite of the trader.

Example

ICICI BANK Weekly Chart