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Some regard the cup with handle as a pattern of exceptional ability. My
testing says otherwise. If you follow O’Neil’s criteria exactly, you’ll find less than 9%
qualify. My cups perform nearly as well and substantially more appear. I don’t believe O’Neil
discovered this pattern but he certainly popularized it in his book,
How to Make Money in Stocks. For more information see pages 149 to 163 of the book Encyclopedia of Chart Patterns, Second Edition and read the following...
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Important Bull Market Results
Overall performance rank (1 is best): 13 out of 23
Break even failure rate: 5%
Average rise: 34%
Throwback rate: 58%
Percentage meeting price target: 50%
Identification Guidelines
The following
guidelines are a subset of O’Neil’s, but performance is nearly as good
and candidates plentiful using this approach.
|
Characteristic |
Discussion |
|
Price trend |
Upward leading to the pattern.
Price should rise by at least 30% leading to the cup. |
|
Shape |
A rounded turn that looks
like a cup with a handle on the right. |
|
U-shaped cup |
The cup should be U-shaped,
not V-shaped. |
|
Handle |
The cup must have a handle
on the right. |
|
Cup duration |
From 7 to 65 weeks |
|
Handle duration |
1 week minimum but usually
lasts 1 to 2 weeks. |
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Handle |
Forms in upper half of cup. |
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Cup |
Cup rims should be near the
same price level. |
Trading Tips
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Trading Tactic |
Explanation |
|
Measure rule |
Measure the height from the right cup lip
(A) to the lowest valley
(B) then multiply by the above “percentage
meeting price target.” Add the result to the breakout price
(A) to get a target. |
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Inner cup |
Cups often form within cups (points
1 and 2), so trade the
inner cup when price rises above the handle (the dashed green line at point 3). |
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Trendline |
If possible, draw a down-sloping trendline along the handle
peaks. A close above the trendline signals an early buy. I show this as the blue
line extending down from point A on the chart to the
right. |
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Buy |
Buy when price closes above the right cup rim
(point A, and the top horizontal
red line). |
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Warning |
Price tends to rise 10% or 15% and then reverses, heading
down. Sell quickly or you may take a loss. |
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Stop |
The handle low (point C) is a
good place to put a stop. Raise the stop as price rises. |
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Continuations |
Patterns that act as continuations of the price trend substantially
outperform those acting as reversals. |
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Throwbacks |
Throwbacks hurt performance. |
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Short handle |
Handles shorter than the median 23 days show superior
postbreakout performance. |
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Volume shape |
Cups with U-shaped volume tend to
perform better
postbreakout. |
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The Measure Rule
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Example
The above figure shows an example of a cup with handle chart pattern. The rise leading to the cup with handle begins
at C and reaches the left cup lip at point A. Since this is
on the weekly scale, the price chart appears narrower than usual, but price rounds downward forming a cup with the
right cup lip at B. The handle lasts a few weeks before price begins moving up. The next
week, price rockets upward about seven points.
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