Cup and Handle—Two Patterns in One
The cup and handle pattern is one of the most prized chart patterns out there. A few years ago I figured out why this is so: It’s because it comprises two bullish chart patterns in one. The first is a “bowl” or cup. The second part of a cup and handle is a...you guessed it...a flag. Both individual patterns are bullish. Both together are very bullish.
- If the flag forms above the first lip of the cup, you trade it in the same way that you trade a bull flag by entering your buy stop order just above the flag area.
- If the flag forms below the first lip of the cup, you either trade it as a flag, or you enter your stop order above the first lip of the cup. In other words, you only get filled when both resistances have been cleared by the stock, preferably with rising volume.
All of the following charts resolved to the upside.
With ARTC in Figure 2.30, the handle (flag) formed its tops just above the first lip of the cup. This is a bonus as you can simply trade it as a flag pattern but with the added bonus that it is in fact a cup and handle and therefore a more powerful pattern.
With CTRP, again the handle forms above the first lip of the cup. Notice how this pattern is literally only a month in duration, starting in mid-November and becoming ready to trade in mid-December.
CTV is slightly messier, and the handle forms below the first lip of the cup. This is not nearly as easy to trade as the previous two charts.
This last example, CYNO, has a very lopsided cup, which lasts for two months before forming an elongated handle—but it is still highly tradable.
The opposite of a cup and handle has no official name but is identical in reverse.
You treat the reverse cup and handle exactly the same as the cup and handle, except it’s in reverse.
- If the bear flag forms below the first low of the upside-down cup, you trade it in the same way that you trade a bear flag by entering your sell stop order just below the flag area.
- If the bear flag forms above the first low of the cup, you either trade it as a bear flag or you enter your sell short stop order below the first low of the upside-down cup. In other words, you only get filled when both support areas have been breached by the stock, preferably with rising volume.
In Figure 2.34, the bear flag formed just above the first low of the pattern. If you wanted to trade this, you’d be safer to wait until the first low of the upside-down cup was breached. Just a few days later the chart formed another bear flag just below the first low of the upside-down cup, providing an opportunity to trade it as a straightforward bear flag.