Chart Pattern (Part 6) - Cup with Handle and Inverted Cup with Handle Patterns
Technical analysis

Chart Pattern (Part 6) – Cup with Handle and Inverted Cup with Handle Patterns

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These patterns are continuation patterns and were developed by William J. O’Neil which he had mentioned in his book “How to make money in stocks”.

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They are basically long term patterns as they take time for perfect formations. 

1. Cup with handle

Cup with handle pattern

It is a bullish continuation pattern which forms after an uptrend. The pattern comprises a cup which is in “U” shaped or has rounded bottom. Remember to not confuse it with “V” shaped bottom as it is more difficult to revert. The cup has two almost equal highs at it’s both sides. Starting from the first side with a high, price decreases smoothly forming the bottom of the cup which forms good support for the price and from here price increases smoothly with another high on the other side of the cup. The two highs at the two sides of the cup mark the resistance for the price. The retracement level while forming the bottom of the cup should be maximum 2/3 of the previous advance. Another important feature of the pattern is the handle of the cup. After the high on the right side of the cup price moves slightly in a downward sloping trading range which might look like a flag in a downward direction. Retracement of the handle should not be more than 1/3 of the cup’s advance as shorter the retracement more bullish will be the pattern. After the formation of the handle, price again moves in an upward direction and the breakout occurs when the price breaks the resistance line made by two highs of the cup. The high volume during the breakout confirms the continuity of trend

 

2. Inverted cup with handle

Inverted cup with handle pattern

It is a bearish continuation pattern which forms after a downtrend. The pattern comprises a cup which is in an inverted “U” shape or has a rounded top. Remember to not confuse it with “V” shape top as it is more difficult to revert. The cup has almost two equal lows at it’s both sides. Starting from the first side with a low, price increases smoothly forming the top of the cup which forms a good resistance for the price and from here price decreases smoothly with another low on the other side of the cup. The two lows at the two sides of the cup form good support for the price. The retracement level while forming the top of the cup should be maximum 2/3 of the previous decline. Another important feature of the pattern is the handle of the inverted cup. After the low on the right side of the inverted cup, price moves slightly in the upward sloping trading range which might look like a flag in an upward direction. Retracement of the handle should not be more than 1/3 of the inverted cup’s decline as shorter the retracement more bearish will be the pattern. After the formation of a handle, price again moves in a downward direction and the breakout occurs when the price breaks the support line made by the two lows of the inverted cup. The high volume during the breakout confirms the continuity of trend.

 

 

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