The Cup & Handle Pattern The Cup & Handle is the corrective action after a powerful stock advance. Generally a stock will have a powerful move of some 2 to 4 months, then go through a market correction. The stock will sell off into the correction in a downward fashion for maybe 20 to 35 percent off the old high point. The time factor is generally anywhere from 8 to 12 weeks depending on the overall market condition. As the stock comes up to test the old highs, the stock will incur selling pressure by the people who bought at or near the old high. This selling pressure will make the stock price drift in a sideways fashion with a bias to the downside for about 4 days to 3 weeks. The handle is generally about 5% below the old high point. A handle that is any lower is generally a defective stock and contains higher risk for failure. The time to buy the stock, is as it emerges into new highs at the top of the handle and not the old high point set some 8 to 12 weeks ago. I have found some of the biggest stock market winners have this very powerful formation. It is one of the best and most reliable formations to look for. However, it is important to note that the best stocks with this formation are found at the beginning of a market move after a good market correction, and not during, or at the end of a major market advance. http://chartpattern.com/cup_handle.html
Hello Chuck, Your absolutely right on this pattern, imo it's substantial enough to use as a one trick pony. There are some that focus and wait on finding just one pattern and trade it. This approach can simplify ones trading and that's always a good thing.
Hello "beginning of a market move after a good market correction, and not during, or at the end of a major market advance." if we knew this "end" or " beginning" information couldnt we trade something else very profitably like ES index which maybe 90 percent here do ? Futures particularly ?
Any cup and handle anyone sees these days is guaranteed 50% PB (likely 61) to kill all the early entries. Old book knowledge simply no longer applies. Sure sometimes a classic pattern plays out but the vast majority of time it doesn't. There's multiple phases of early entries getting stopped out on both sides and then the real move happens.
Its best as always to backtest the pattern like any other pattern. Any trader will have there own personal interpretations of the pattern which is why the results are different from trader to trader. Also, I've seen program codes for this pattern and that means it can be applied objectively. Yet, again, program codes by one trader will produce results that are different than the program codes by another trader because traders programmed the pattern via their own interpretations of the pattern. More importantly, when the pattern was designed by William O'neil...it was being applied with fundamental analysis for investing (not day trading) in stocks and mutual funds as part of that CAN SLIM investing approach. Originally discussed in that newspaper called Investors Business Daily (IBD). I subscribed to that as a kid when I was a member of my school's young investor club. The cup with handle pattern was the least important aspect of CAN SLIM. My old man had a copy of some of O'neil's books...great read for kids wanting to learn about investing. I'm not sure at what point did day traders come along in the early 1990's and said "cool...I'll try this on day trading with fundamental analysis". Later, by mid 1990's...the needed fundamental analysis, portfolio management/diversification was abandon by traders. Simply, many traders don't use the pattern the way it was originally designed. In fact, I remember in an interview, O'neil stated he didn't like how people were using it away from its original design. Anyways, I'm just a big fan that if someone is going to use a pattern, its best to learn its history and understand what its designed for prior to using it in a way it was not intended to be used. Simply, if you're going to apply this pattern strictly via technical analysis...you're not using the pattern correctly and don't go blaming O'neil for it. I have few signed books by him and archival storage of some of the earlier Investors Business Daily...great newspaper by a really nice guy.