What is a Cup and Handle Pattern?
The Great Recession technically began in late 2007 and lasted until the summer of 2009, but its impact lasted a lot longer than those 18 months. The housing market has mostly bounced back, but other industries haven’t. For one thing, Americans are now less likely to invest in the stock market. In late 2017, a Gallup poll showed that only 54 percent of Americans have some sort of stake in the stock market, be it through mutual funds, individual stocks, or retirement plans and pensions. That may seem like a decent number, but it’s a decrease of 11 percent since the Great Recession struck.
If you’ve been holding off on getting into stocks, now’s a good time to educate yourself about trading strategies so you can feel more confident about getting involved. To do that, let’s talk about some of the language surrounding trading, including the “cup and handle” trading strategy.
Understanding continuation patterns
When someone refers to “cup and handle,” they’re referring to something known as a continuation pattern. A newbie looking at a pricing chart can immediately get confused by all the lines on said chart. What do they mean? Is there any rhyme or reason to it? There is, if you know what to look for, and that’s where continuation patterns come in. Think of it kind of like those Magic Eye pictures you used to see at your dentist’s office. With Magic Eye, you had to look at it a certain way to get what was happening, but once you trained your eyes to look at it properly, everything made sense.
When you see specific shapes on the charts, you know that a trend is more likely to continue. They can take a while to spot, because it takes a while for the lines on a chart to resemble a shape. If you’re watching someone draw a picture, at first it’s going to look like random scribbles. Things get much clearer once they’ve made a few strokes and established the beginnings of a shape. At that point, it’s easier to understand what’s coming next.
A continuation pattern only lasts a certain amount of time. According to Investopedia, “Continuation patterns occur mid-trend and are a pause in the price action of varying durations.” Once the shape is done, then presumably so is the pattern. At that point, the stock is likely to return to the prior trend. But the shape of the pattern gives you an idea of what to expect until that happens.
Cup and handle
The cup and handle strategy is a bullish continuation pattern. For a quick refresher, a bullish stock market is one in which prices are rising, while a bearish stock market means the prices are falling. Not surprisingly, a cup and handle pattern looks a bit like a teacup with a handle. The handle is on the right side, which means the shape of the cup is going to appear first on the pricing chart.
What happens right before the pattern forms? You’ll see a stock run-up on the left side, which means the price is going up. After that peak, something called a retracement is going to happen. A retracement is a short-term reversal, and in this case, that short-term reversal is going to form the rounded bottom of the cup. You’ll want to look for a U-shaped bottom rather than a sharp V-shape, since a V-shape can mean something else. But if you see a rounded bottom, that means buyers have got the situation under control and new highs are on the way.
When the handle forms, it should be two parallel lines inside a quite narrow price range. Spotting the handle can be especially hard, so you’ll want to observe a lot of cup and handle patterns before you try to jump in and use it as a signal for yourself.