Cup and Handle Definition

What Is a Cup and Deal with?

A cup and deal with worth sample on a safety’s worth chart is a technical indicator that resembles a cup with a deal with, the place the cup is within the form of a “u” and the deal with has a slight downward drift.

The cup and deal with is taken into account a bullish sign, with the right-hand aspect of the sample usually experiencing decrease buying and selling quantity. The sample’s formation could also be as brief as seven weeks or so long as 65 weeks.

What Does a Cup and Deal with Inform You?

American technician William J. O’Neil outlined the cup and deal with (C&H) sample in his 1988 traditional, How you can Make Cash in Shares, including technical necessities by means of a collection of articles printed in Investor’s Enterprise Day by day, which he based in 1984. O’Neil included time-frame measurements for every element, in addition to an in depth description of the rounded lows that give the sample its distinctive teacup look.

As a inventory forming this sample exams previous highs, it’s more likely to incur promoting strain from buyers who beforehand purchased at these ranges; promoting strain is more likely to make worth consolidate with a bent towards a downtrend pattern for a interval of 4 days to 4 weeks, earlier than advancing larger. A cup and deal with is taken into account a bullish continuation sample and is used to establish shopping for alternatives.

It’s price contemplating the next when detecting cup and deal with patterns:

• Size: Usually, cups with longer and extra “U” formed bottoms present a stronger sign. Keep away from cups with sharp “V” bottoms.
• Depth: Ideally, the cup shouldn’t be overly deep. Keep away from handles which can be overly deep additionally, as handles ought to type within the prime half of the cup sample.
• Quantity: Quantity ought to lower as costs decline and stay decrease than common within the base of the bowl; it ought to then enhance when the inventory begins to make its transfer larger, again as much as check the earlier excessive.

A retest of earlier resistance just isn’t required to the touch or come inside a number of ticks of the previous excessive; nevertheless, the additional the highest of the deal with is away from the highs, the extra important the breakout must be.

How you can Commerce the Cup and Deal with

There are a number of methods to method buying and selling the cup and deal with, however essentially the most fundamental is to search for getting into a protracted place. The picture beneath depicts a traditional cup and deal with formation. Place a cease purchase order barely above the higher pattern line of the deal with. Order execution ought to solely happen if the value breaks the sample’s resistance. Merchants might expertise extra slippage and enter a false breakout utilizing an aggressive entry.

Alternatively, anticipate the value to shut above the higher pattern line of the deal with, subsequently place a restrict order barely beneath the sample’s breakout degree, making an attempt to get an execution if the value retraces. There’s a threat of lacking the commerce if the value continues to advance and doesn’t pull again.

A revenue goal is set by measuring the gap between the underside of the cup and the sample’s breakout degree and increasing that distance upward from the breakout. For instance, if the gap between the underside of the cup and deal with breakout degree is 20 factors, a revenue goal is positioned 20 factors above the sample’s deal with. Cease-loss orders could also be positioned both beneath the deal with or beneath the cup relying on the dealer’s threat tolerance and market volatility.

Instance Buying and selling the Cup and Deal with

Now let’s take into account a real-world historic instance utilizing Wynn Resorts, Restricted (WYNN), which went public on the Nasdaq trade close to $13 in October 2002 and rose to $154 5 years later. The following decline ended inside two factors of the preliminary public providing (IPO) worth, far exceeding O’Neil’s requirement for a shallow cup excessive within the prior pattern. The following restoration wave reached the prior excessive in 2011, practically 10 years after the primary print.

The deal with follows the traditional pullback expectation, discovering assist on the 50% retracement in a rounded form, and returns to the excessive for a second time 14 months later. The inventory broke out in October 2013 and added 90 factors within the following 5 months.

Limitations of the Cup and Deal with

Like all technical indicators, the cup and deal with needs to be utilized in live performance with different indicators and indicators earlier than making a buying and selling resolution. Particularly, with the cup and deal with, sure limitations have been recognized by practitioners. The primary is that it may possibly take a while for the sample to totally type, which may result in late selections. Whereas one month to 1 12 months is the standard timeframe for a cup and deal with to type, it may possibly additionally occur fairly shortly or take a number of years to ascertain itself, making it ambiguous in some circumstances.

One other concern has to do with the depth of the cup a part of the formation. Typically a shallower cup generally is a sign, whereas different occasions a deep cup can produce a false sign. Typically the cup varieties with out the attribute deal with. Lastly, one limitation shared throughout many technical patterns is that it may be unreliable in illiquid shares.