RiskPicksWhat is a Cup and Handle?
The cup and handle is a bullish continuation pattern where a stock forms a rounded bottom (the cup), rallies back to the prior high, pulls back slightly (the handle), and then breaks out above the prior high. It was popularized by William O'Neil and is one of the most watched patterns among growth stock traders.
The structure
- Prior uptrend: the stock was trending up before forming the pattern
- The cup: a rounded bottom that can take weeks or months to form. The shape should be a gradual U, not a sharp V
- Rally back to the rim: price climbs back to the level where the cup started
- The handle: a small pullback (typically 5-15% of the cup depth) near the highs. This is the final shakeout before the breakout
- Breakout: price breaks above the cup's rim (the prior high) on increasing volume
Trading the pattern
- Entry: buy the breakout above the handle's high (the rim of the cup)
- Stop: below the handle's low
- Target: the depth of the cup projected above the breakout point
- Volume: volume should be declining during the handle and expanding on the breakout
The handle is where weak holders give up and sell, allowing the stock to consolidate before the next leg up. Without the handle, a breakout from the cup rim is more likely to fail.