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The buy point occurs when the stock breaks out or moves upward through the old point of resistance . Consider a scenario where a stock has recently reached a high after significant momentum, but has since corrected, falling almost 50%. At this point, an investor may purchase the stock, anticipating that it will bounce back to previous levels. The stock then cup and handle chart pattern rebounds, testing the previous high resistance levels, after which it falls into a sideways trend. In the final leg of the pattern, the stock exceeds these resistance levels, soaring 50% above the previous high. Technical traders using this indicator should place a stop buy order slightly above the upper trendline of the handle part of the pattern.
The subsequent recovery wave reached the prior high in 2011, nearly 10 years after the first print. The handle follows the classic pullback expectation, finding support at the 50% retracement in a rounded shape, and returns to the high for a second time 14 months later. The stock broke out in October 2013 and added 90 points in the following five months. During 2016, Netgear stock rose from a low of $33.39 to $60.80 in a steep uptrend. From October 2016 to December 2016 it formed a cup formation (u-shape), and since December, it is now forming a handle structure (see “Gearing for a breakout,” below). The profitable Cup and Handle trading strategy might be a humorous name.
Another method for identifying the profit target is to plot a Fibonacci extension. Plot the extension from the base of the cup to the start of the handle, then to the handle’s low. One hundred percent of the extension is considered a conservative price target for cup and handle pattern breakouts, while 162 percent is considered an aggressive price target. To figure out the profit target when trading a cup and handle pattern, compare the price at the bottom of the cup to the price at the start of the handle. Take that number, and add it to the price at which the handle breaks upward – that is the price at which it is wise to exit the position.
Cup And Handle Definition
The handle is the consolidation before breakout and can retrace up to 1/3 of the cup’s advance, but usually not more. A cup and handle is considered a bullish signal extending an uptrend, and is used to spot opportunities to go long. A cup and handle is a technical chart pattern that resembles a cup and handle where the cup is in the shape of a “u” and the handle has a slight downward drift. This gradual and slow range is what will set the stage for the bullish trend to resume. People will think this is a double top which will trap some weak sellers when we finally break upwards. Normally, the handle of a tea cup can take many shapes.
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Opening A Trade
The handle formed after a strong upward gap and formation of a short-term bearish island cluster of two sessions . The handle moved price from $64.50 down to $62.50 over less than one week. As with any continuation pattern, you rely on a confirmation in one form or another. This may occur as a second technical price signal, a candlestick continuation, volume spike, or change in momentum.
- It can be used to spot shares potentially poised for growth if correctly identified and also caught in time.
- As the cup is completed, price trades sideways, and a trading range is established on the right-hand side and the handle is formed.
- No communication from Rick Saddler, Doug Campbell or this website should be considered as financial or trading advice.
- They are considered to be bullish continuation patterns.
Stop loss orders may be placed either below the handle or below the cup depending on the trader’s risk tolerance and market volatility. A cup and handle formation is a type of pattern that can be seen on price charts from several different financial markets. Technical analysts will use this pattern as an indication that the market is about to move upward.
How To Trade When You See The Cup And Handle Pattern
From there the stock trades sideways for some time, then rises to form the right side of the cup. After completion of the cup, before the stock breaks out to new highs, the price often hits resistance and pulls back a little. This pullback forms what looks like a handle on the cup. The peak at the right side Futures exchange of the cup defines the buy or breakout point, referred to as the “pivot price”. The cup and handle pattern is one of the oldest chart patterns you will find in technical analysis. In my experience, it’s also one of the more reliable chart patterns, as it takes quite some time for the formation to setup.
The high and the low of this candle could be used to draw a horizontal support / resistance zone on the chart. The trade should be closed if the price action breaks the upper barrier. You can even adjust your stop loss order right above the upper level of the zone. The confirmation signal of the figure comes at the moment when the price action breaks the handle downwards.
Bullish Cup And Handle Trading Example
These include comprehensive descriptions and images so that you can recognize important chart patterns scenarios and become a better trader. A cup and handle is considered a bullish continuation pattern and is used to identify buying Currency Pair opportunities. The cup and handle chart pattern does have a few limitations. Firstly, it does not occur within a specific timeframe. Sometimes it forms within a few days, but it can take up to a year for the pattern to fully form.
Reversal Candlestick Patterns: Hammer And Hanging Man
The cup and handle pattern as a lower failure rate when compared to other chart patterns, meaning it is a good indication of what’s to come. Patterns were shorter handles have a higher success rate than patterns with longer handles. Patterns with a more bottomless cup accompanied by a slightly more upper left lip versus right lip also have a higher success rate. The Cup with Handle is a bullish continuation pattern that marks a consolidation period followed by a breakout. It was developed by William O’Neil and introduced in his 1988 book, How to Make Money in Stocks. The subsequent decline ended within two points of theinitial public offering price, far exceeding O’Neil’s requirement for a shallow cup high in the prior trend.
At the end of the reversed bearish move, the price reverses again and starts the creation of a bullish handle. The change in the move is so gradual that the price action creates a rounded bottom on the chart. The beginning of the price decrease and the end of the price increase are approximately on the same level. This rounded structure is the Cup portion within the pattern. When the conditions described in these 4 stages are satisfied, we have a valid CwH pattern and the stock will be placed on our CwH watchlist, CwHWatch. If the conditions change so the stock no longer meets the criteria, then the stock will be dropped from CwHWatch.
The breakout propels the stock upwards as seats on the bull bus get more expensive because no one wants to give up their long positions because the majority are profitable. According to Bulkowski , the averaged maximum decline of the inverse cup and handle is 16%. Target 2 – equals the vertical size of the cup applied at the moment of the breakout through the handle. Sometimes, the beginning of the decrease and the end of the increase could diverge in terms of the level they are supposed to be located at. However, a small discrepancy between the tops of the two trends is admissible. When looking at the cup, you want to make sure that it is rounded.
The cup-with-handle formation in itself does not signify a “buy” signal. Some stocks that complete this setup do not break out. They often roll over, forming the right shoulder of a head-and-shoulders topping pattern and fail disastrously. From the cup-with-handle pattern identification point, the user should wait for the stock to break out on significant volume before buying. When you are day trading cup and handle patterns, you must realize that not all handles are created equally. The funny thing about the formation is that while the handle is the smallest portion of the pattern, it is actually the most important.
The upside price target is calculated by adding the distance from the bottom of the cup to the top to the top. Includes color-coded volume divergence analysis as well. Call me crazy, but actually using the technicals right in front of my face makes far more sense than applying some universal profit target system. The sad thing is that the pattern was sound, but the profit target literally looks like you are recreating shelves in my kitchen. It just doesn’t make sense to me to set your targets this way. The breakout should produce significant volume and price expansion.
Author: Thomas Westwater