The Cup with Handle is a bullish continuation pattern that marks a consolidation period followed by a breakout and is one of the easiest patterns to identify.
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.
The cup has a soft U-shape, retraces the prior move for about ⅓ and looks like a bowl. After forming the cup, price pulls back to about ⅓ of the cups advance, forming the handle.
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.
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The handle is a relatively short period of consolidation.
The full pattern is complete when price breaks out of this consolidation in the direction of the cups advance.
The price will likely continue in that direction though conservative traders may look for additional confirmation.
The target can be estimated using the technique of measuring the distance from the right peak of the cup to the bottom of the cup and extending it in the direction of the breakout.
A common stop level is just outside the handle on the opposite side of the breakout.
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