The cup and handle pattern is one of the most reliable bullish continuation patterns in technical analysis. First popularized by William O'Neil in his book "How to Make Money in Stocks," this pattern has been a favorite among growth stock traders for decades. When properly identified, it can signal excellent buying opportunities with well-defined risk.
What is the Cup and Handle Pattern?
The cup and handle consists of two parts: a rounded bottom (the cup) followed by a smaller consolidation (the handle). The pattern forms when a stock in an uptrend consolidates, creates a U-shaped correction, rallies back to the prior high, consolidates again briefly, then breaks out to new highs.
Pattern Components
- Prior Uptrend: The stock must be in an established uptrend before the cup forms.
- The Cup: A rounded, U-shaped correction that retraces 15-35% of the prior advance.
- Cup Lip: The resistance level at the prior high where the cup begins and ends.
- The Handle: A smaller pullback, typically 5-15%, that forms near the cup lip.
- Breakout Point: The buy signal occurs when price breaks above the handle resistance.
William O'Neil's Rule: The ideal cup should retrace no more than one-third to one-half of the prior advance. Deeper cups are less reliable.
Identifying a Valid Cup and Handle
Quality matters with this pattern. Here are the characteristics of the best setups.
Cup Characteristics
- Shape: U-shaped, not V-shaped. A rounded bottom shows gradual accumulation.
- Duration: Typically 7 to 65 weeks for daily charts. Shorter cups may be less reliable.
- Depth: Ideally 15-35% from cup lip to low. Deeper than 50% often fail.
- Right Side Strength: The right side of the cup should show increasing momentum.
Handle Characteristics
- Position: Should form in the upper half of the cup, not drop below the midpoint.
- Depth: Typically 5-15% pullback from the cup lip.
- Duration: Usually 1-4 weeks, shorter than the cup.
- Shape: Slight downward drift or tight consolidation is ideal.
Classic Cup and Handle Example
NVDA rises from $200 to $280, then corrects to $230 over 10 weeks forming a U-shape. It rallies back to $280, pulls back to $265 over 2 weeks (the handle), then breaks out above $280 with volume. Target: $360.
Trading the Pattern
The cup and handle offers clear entry, stop, and target levels.
Entry Strategies
- Breakout Entry: Buy when price breaks above the handle resistance (cup lip) with strong volume. This is the classic entry.
- Handle Pullback: Buy during the handle formation when price holds above the 50-day moving average.
- Add on Strength: Add to your position if the stock continues higher after the initial breakout.
Volume Requirements
Volume confirmation is essential for cup and handle breakouts.
- Cup Low: Volume should dry up at the bottom of the cup.
- Right Side Rally: Volume should increase as price rises from the cup low.
- Handle Formation: Volume should contract during the handle.
- Breakout Day: Volume should be at least 50% above average on the breakout.
Volume Rule: A breakout on below-average volume is a warning sign. The best breakouts have explosive volume.
Price Target Calculation
The measured move target is based on the depth of the cup.
Calculating Your Target
- Cup lip (breakout point): $280
- Cup low: $230
- Cup depth: $280 - $230 = $50
- Price target: $280 + $50 = $330
Many strong breakouts exceed the measured move target, so consider scaling out rather than selling everything at the target.
Stop Loss Placement
- Below Handle Low: Place your stop below the lowest point of the handle. This invalidates the pattern if hit.
- Below Entry by Percentage: Some traders use 7-8% below entry as a maximum loss point.
- Below 50-day Moving Average: A close below the 50-day MA can signal pattern failure.
Cup and Handle Variations
Not all cup and handles look exactly the same. Here are common variations.
Cup Without Handle
Sometimes the pattern breaks out directly from the cup lip without forming a handle. These can work but are generally less reliable than patterns with handles.
High Handle
A handle that forms above the cup lip (after a slight breakout) can still be valid. Watch for the handle to stay tight and not give back too much of the initial breakout gains.
Deep Handle
A handle that drops below the midpoint of the cup is a warning sign. The pattern may fail or produce weak breakouts.
Inverted Cup and Handle
The bearish version with a rounded top followed by a small rally (handle) before breaking down. Used for short selling.
Common Mistakes
Avoid these errors when trading cup and handle patterns.
- V-Shaped Cups: Sharp V-shaped corrections are not cups. The bottom should be rounded.
- Too Deep: Cups that correct more than 50% often indicate the stock is in distribution, not accumulation.
- Weak Breakout Volume: Buying breakouts on low volume leads to many failed trades.
- Ignoring Market Conditions: Cup and handle patterns work best in bull markets, not bear markets.
- Chasing Extended Breakouts: If you miss the initial breakout, wait for a pullback rather than chasing.
Multiple Timeframe Analysis
Use multiple timeframes to confirm your cup and handle setups.
- Weekly Charts: Identify the major pattern structure and overall trend.
- Daily Charts: Fine-tune entry timing and identify the handle formation.
- Intraday Charts: Watch for strong opening action on breakout day.
Combining with Fundamentals
The best cup and handle trades often combine technical and fundamental analysis.
What to Look For
- Earnings Growth: Companies with accelerating earnings often form the best patterns.
- Revenue Growth: Sales growth confirms the business is expanding.
- Industry Leadership: The stock should be among the strongest in its industry group.
- Institutional Sponsorship: Increasing mutual fund ownership supports the breakout.
Track Your Breakout Trades
Pro Trader Dashboard helps you analyze your cup and handle trades. See which setups work best and refine your pattern recognition skills.
Summary
The cup and handle is a powerful bullish continuation pattern that can produce significant gains when traded correctly. Focus on finding U-shaped cups with proper depth, handles that form in the upper half of the cup, and breakouts with strong volume. Always use stops below the handle low and consider the fundamental story behind the stock. With practice and patience, the cup and handle can become one of your most reliable trading setups.
Related reading: Ascending Triangle Pattern and Flag Pattern Trading.