A Look at 'Cup and Handle' Chart Patterns

In the past I introduced some of my favorite indicators that are kept in a personal “technical toolbox.” This collection of indicators, tools and axioms has grown over 30-plus years and continues to do so. Charting patterns are a big part of my collection, and today I will share another somewhat rare but reliable pattern.

Many traders rely on technical patterns to make decisions. The most prevalent shapes are triangular (pennants) and channels (flags). Flags can be horizontal or slant either up or down during a trend. Double tops/bottoms and head and shoulders are a couple of the more popular patterns traders use to enter positions. The one I want to share today is known as the “cup and handle” pattern. This can be a bullish or bearish setup. For this example, I will focus on a bullish pattern.

First, we need to know how the pattern forms. The left side of the cup takes shape as the market declines in a methodical slow-moving trend and ends with a rounded bottom. The right side of the cup usually forms with a rally that often stalls when the market reaches overbought status. When the speed of the rally is above normal, a rest period or small correction lower often occurs and takes the shape of the cup handle. The handle formation is the chance to reload on a long position at temporarily cheap prices. The daily XLB graphs below shows a couple of samples of this phenomenon.

The inverted cup and handle pattern is a chance to re-enter a short position in a downtrend.

Scanning markets for repeatable and reliable patterns is essential to filter many markets for a few great opportunities.

John Seguin, Market Taker Mentoring

Trader Education