The Cup With Handle Chart Pattern
The majority of the greatest stock winners (works in all markets) have traced this pattern. As the name implies, the cup with handle pattern resembles the profile of a tea cup with a handle on the right side. The pattern develops after the stock has gone up at least 30% over a period of time
The pattern begins with a U-shaped formation in which the stock initially drops approximately 20% to 30% from its peak (from point 1 to point 2). In this example, U.S. Surgical fell 20%. During bear markets, a decline of up to 50% may be a normal part of this chart pattern. A weak overall market or disappointing news about the company could have triggered the drop.
Volume tends to decrease as the stock goes through the bottoming phase, indicating the selling wave is dissipating. Often, volume climbs on days or weeks when the stock closes higher, suggesting that buyers are outweighing sellers.
The stock stops climbing at a point roughly equal to the prior peak (point 3). In this example, U.S. Surgical climbed back to $59.75. Usually, this action reflects a tendency by investors who saw their shares lose value during the sell-off to sell the stock, content to walk away by just breaking even.
Other Important Characteristics Of The Cup With Handle
The downward phase, or left side, of the cup should form over a period of at least two weeks. Typically, the left side corrects 5 to 7 weeks or more.
A stock, during a bull market, should trade in a fairly tight price range of 10 to 15% while forming the handle. Choppy handles illustrate more uncertainty than satisfaction among shareholders.
The handle should not drift upward. That's when the daily or weekly price lows trend upward over several weeks. Such upward-wedging handles are failure prone.
The stock's Relative Strength Line should not lag the stock's price into new highs. It's best when the RS line preceeds or accompanies the stock's price into new high ground.
Look at each week of the base before it breaks out. The weeks in which the stock closed up on higher volume than average should outnumber the weeks closing lower on above-average volume. This applies to the cup with handle as well as any other type of base.
The handle should form above a stock's 200-day moving average line.
Why Wouldn't You Buy At The Bottom Of The Cup?
Because you need to wait for the stock to prove its strength by regaining most of the ground it lost and show it has power and potential. That's why the volume breakout is important: it usually signals a new rush of buyers likely to take the stock into a sustained climb. Besides, there's no way you can tell for sure if a stock is at the bottom of a cup until the pattern is complete. It may never get back to the upper part of its base.