Cups and Handles

To caveman & love2bake:


A reference to cup and handle:

The formation occurs after a trend change, where a series of rising peaks and troughs is followed by a reversal of the price trend. A downtrend of lower peaks and lower troughs form the left side of the cup, rounds out and later begins a new rising trend so that a cup is formed. The cup is in the shape of a "U". The handle is a drop in prices after the right side of the lip of the cup has been reached. The handle can have a variety of shapes and can consist of double handles and high handles.

As long as the price does not fall back through the 200 day moving average in forming the handle, the expectation for the pattern is for prices to rise after completion of the handle.

Trend: To qualify as a continuation pattern, a prior trend should exist. Ideally, the trend should be a few months old and not too mature. The more mature the trend, the less chance that the pattern marks a continuation or the less upside potential.

Cup: 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.

Cup Depth: Ideally, the depth of the cup should retrace 1/3 or less of the previous advance. However, with volatile markets and over-reactions, the retracement could range from 1/3 to 1/2. In extreme situations, the maximum retracement could be 2/3, which is conforms with Dow Theory.

Handle: After the high forms on the right side of the cup, there is a pullback that forms the handle. Sometimes this handle resembles a flag or pennant that slopes downward, other times just a short pullback. The handle represents the final consolidation/pullback before the big breakout and can retrace up to 1/3 of the cup's advance, but usually not more. The smaller the retracement is, the more bullish the formation and significant the breakout. Sometimes it is prudent to wait for a break above the resistance line established by the highs of the cup.

Duration: The cup can extend from 1 to 6 months, sometimes longer on weekly charts. The handle can be from 1 week to many weeks and ideally completes within 1-4 weeks.

Volume: There should be a substantial increase in volume on the breakout above the handle's resistance.

Target: The projected advance after breakout can be estimated by measuring the distance from the right peak of the cup to the bottom of the cup.
As with most chart patterns, it is more important to capture the essence of the pattern than the particulars. The cup is a bowl-shaped consolidation and the handle is a short pullback followed by a breakout with expanding volume. A cup retracement of 62% may not fit the pattern requirements, but a particular stock's pattern may still capture the essence of the Cup with Handle.


So lets take a look at SP chem:

1. SP chem is indeed in a cup and handle formation.
2. The big monies are still inside, no significant signs of unloading.
3. Today formed a small hammer.

Possible cheonging soon, but if it breaks the 200ma (the purple line) which is currently at $1.10 then watch out for more downside.

Whiteboard:
EP: $1.18 - 1.22 (EP2: $1.30 - $1.40 << When cup top broken, confirmation of C&H)
TP1: $1.24
TP2: $1.35
TP3: $1.78
CP: 50% at 6 bids, 100% at $1.10