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Going to analyze why a cup with handle forms, the desirable features of the pattern and how we select them.

Stage 1: Setup. The pattern starts with a stock rising from a former base. At some point, profit taking sets-in and the stock begins to decline, ending the setup. The maximum price reached at the end of Stage 1 is called the "Left Cup", and the amount by which the stock rose from its prior low is the Setup Gain. To ensure a well-defined left cup, require that the setup gain be at least 30% from the prior low level for it to qualify as a valid left cup.


Stage 2: Decline. The stock now collapses into a new base. The collapse can occur for any number of reasons: poor company results; over-all market conditions; bad news; profit taking after a strong setup stage, and so on. There should be strong selling and volume should be well above average for the first few days of the collapse. Note that collapsing price alone is not sufficient to provide a good CwH pattern, volume is also important. This is because you want most of the buyers from the setup stage to liquidate their holdings, so there will not be a lot of overhead supply when the stock begins to climb the right side of the cup. The combined price and volume action in stage 2 is important if the eventual breakout is to succeed. By the end of stage 2, volume should have fallen to well below average levels as most holders have sold and there is little buying activity, if any. The depth of the base is important also. You do not want the stock to collapse to a level from which recovery will be difficult, if not impossible, so when selecting CwH stocks for your watchlist,  limit the cup depth to be at most 60% of the left cup price.


Stage 3: Recovery. If and when the conditions that brought about the stage 2 collapse have been resolved, the stock may begin to recover. If it does so, the stock will start to climb the right side of the cup. As it does so, we like to see above average volume on days when the price moves up, which indicates that institutions are taking an interest in the stock, but light volume on days when it closes down, indicating that there are small numbers of sellers. Ideally, this constructive price and volume action will strengthen as the right side of the cup is formed and the stock moves higher. Meanwhile, there will be some holders of the stock who bought at or near the left cup price but didn't sell in stage 2. These holders are waiting for the time when they can recoup some or all of their losses. There will also be profit taking by bottom-fishers. As losses are covered or profits are taken there will be pauses in the recovery and a typical cup right-side will exhibit a stair-step characteristic, rather than the smooth ascension. Each of these pauses, or pullbacks, reduces the overhead supply left over from the left cup setup.

As the price on the right side approaches the left cup level, the last holders will finally decide to cut their losses and there will be a large volume sell-off. This often is preceded by a day on which the price spikes on high volume which the sellers have interpreted as an overbought condition and therefore a last opportunity to recoup their losses. This is the point at which the pivot forms, and marks the end of the recovery stage.

There are several technical conditions that must be met before you will recognize a valid pivot. Firstly you want the stock to have attained a strong relative strength when compared to all other stocks, so require an RS of 70 on a scale from 1-99. You also want the pivot to be approaching the left cup level, so require the pivot price to be at least 60% of the left cup. Thirdly, there must have been sufficient time for a shakeout of holders during stage 2, and sufficient time for institutions to notice and take an interest in the stock during stage 3. This is essential if the stock is to be projected to new highs after the breakout. Consequently, require the distance from the left cup to the pivot, to be at least 6 weeks (30 sessions). On the other hand, don't want the cup to be so long as to be meaningless, so there is a maximum cup length of 325 sessions imposed.

Mentioned above the need for constructive price/volume action while the stock is building the right side of its cup. This is measured by Right Cup Quality and is a component of overall Chart Quality.


Stage 4: Consolidation. After the pivot you want and expect to see a shakeout while the overhead supply is depleted. This will cause the price to decline, initially on high volume but then the price should stabilize or drift down on volume well below average levels. The institutions who are tracking the stock know that they want the overhead supply eliminated and will wait for these stable conditions to materialize before they pounce. To identify well behaved handles,  require that the decline (or "droop") in the handle should not be more than 30% of the pivot price, that the mid-point of the handle be above the mid-point of the base and that the minimum time spent in the handle should be two days, but that the overall handle length should not be more than 90 days. Also you do not want the handle to be disproportionate to the cup, so require that the handle be no longer than a third of the cup length. The two day handle minimum is considerably shorter than that recommended by William O'Neil but you want to make sure you don't miss any strong candidates.

Measure the price/volume action in the handle, called Handle Quality, which is also a component of Chart Quality, mentioned earlier.

After the price has stabilized, it is not uncommon to see the price begin to rise on higher volume. This is an indication that institutions are starting to nibble and may indicate a strong breakout to come. I have noticed that breakouts are 17% stronger, on average, when the price and volume rise on the day before the breakout.

When the conditions described in these 4 stages are satisfied, you have a valid CwH pattern and the stock will be placed on CwH watchlist. If the conditions change so the stock no longer meets the criteria, then the stock will be dropped from CwHWatch.  Monitor the stock while it is on CwH Watch and issue a real-time alert if the pivot price is met or exceeded and the projected daily volume exceeded 1.5 times the average daily volume - an indication that institutions are buying the stock in large quantities.

Cup with Handle (Continuation) Pattern.......

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 cup.
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.

hey Setravis,  Nice overview of a Cup & Handle.  As it happens I was looking for exactly this earlier this week.  I had identified an cup & handle pattern on AAPL before they reported earnings this week.  I think it meets most of your criteria here (although volume at the base and the right side of the cup doesn't quite fit, in essence I think the pattern is valid).  My only question is when measuring targets for C&H patterns, does your upside target measure from the break of the handle or from the break of the top of the cup?  If it is from the break of the handle, my target on AAPL for this formation is 107.63, but if it is from the break of the cup rim, then it is 110.23.

Something I have also noticed is that quite often cup & handle patterns form as part of a larger ascending triangle pattern.  But we should definitely keep an eye out for more of them - generally they tend to be a bit uncommon, but when you do find them, they cn often be very powerful.

gotta love the old cup and handle

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 cup.

Heres one that's in progress, looks real good to.  I took a position in EGMI, not realizing the CWH pattern but I seen it today.

Wonderful notes on C&H.

Do we have the technology now to screen for C&H patterns, by any chance?

Nidhi

Cup and Handle pattern...
Take a look at this 5 year chart on CPST