with Handle (Continuation)
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.
As its name implies, there are two parts to the pattern: the cup and the
handle. The cup forms after an advance and looks like a bowl or rounding bottom.
As the cup is completed, a trading range develops on the right hand side and the
handle is formed. A subsequent breakout from the handle's trading range signals
a continuation of the prior advance.
- Trend: To qualify as a continuation pattern, a prior trend should
exist. Ideally, the trend should be a few months old and not too mature. The
more mature the trend, the less chance that the pattern marks a continuation
or the less upside potential.
- Cup: The cup should be "U" shaped and resemble a bowl or rounding
bottom. A "V" shaped bottom would be considered too sharp of a reversal to
qualify. The softer "U" shape ensures that the cup is a consolidation pattern
with valid support at the bottom of the "U". The perfect pattern would have
equal highs on both sides of the cup, but this is not always the case.
- Cup Depth: Ideally, the depth of the cup should retrace 1/3 or less
of the previous advance. However, with volatile markets and over-reactions,
the retracement could range from 1/3 to 1/2. In extreme situations, the
maximum retracement could be 2/3, which is conforms with Dow Theory.
- Handle: After the high forms on the right side of the cup, there is
a pullback that forms the handle. Sometimes this handle resembles a flag or
pennant that slopes downward, other times just a short pullback. The handle
represents the final consolidation/pullback before the big breakout and can
retrace up to 1/3 of the cup's advance, but usually not more. The smaller the
retracement is, the more bullish the formation and significant the breakout.
Sometimes it is prudent to wait for a break above the resistance line
established by the highs of the cup.
- Duration: The cup can extend from 1 to 6 months, sometimes longer
on weekly charts. The handle can be from 1 week to many weeks and ideally
completes within 1-4 weeks.
- Volume: There should be a substantial increase in volume on the
breakout above the handle's resistance.
- Target: The projected advance after breakout can be estimated by
measuring the distance from the right peak of the cup to the bottom of the
As with most chart patterns, it is more important to capture the essence of
the pattern than the particulars. The cup is a bowl-shaped consolidation and the
handle is a short pullback followed by a breakout with expanding volume. A cup
retracement of 62% may not fit the pattern requirements, but a particular
stock's pattern may still capture the essence of the Cup with Handle.
- Trend: EMC established the bull trend by advancing from 10 and
change to above 30 in about 5 months. The stock peaked in March and then began
to pull back and consolidate its large gains.
- Cup: The April decline was quite sharp, but the lows extended over
a two month period to form the bowl that marked a consolidation period. Also
note that support was found from the Feb-99 lows.
- Cup Depth: The low of the cup retraced 42% of the previous advance.
After an advance in June and July, the stock peaked at 32.69 to complete the
cup (red arrow).
- Handle: Another consolidation period began in July to start the
handle formation. There was a sharp decline in August that caused the handle
to retrace more than 1/3 of the cup's advance. However, there was a quick
recovery and the stock traded back up within the normal handle boundaries
within a week. I believe the essence of the formation remained valid after
this sharp decline.
- Duration: The cup extended for about 3 months and the handle for
about 1 1/2 months.
- Volume: In early Sept-00, the stock broke handle resistance with a
gap up and volume expansion (green arrow). In addition, Chaikin Money Flow
soared above +20%.
- Target: The projected advance after breakout was estimated at 9
points from the breakout around 32. EMC easily fulfilled this target over the
next few months.