Technically Speaking Archives
Technical Indicators & Overlays
LATEST TECHNICALLY SPEAKING ARTICLE:
The Cup-With-Handle Pattern
December 19, 2015
Technical analysis, in broad terms, is the analysis of historical price and volume data to help identify trends that may predict future price movements. Technicians use technical indicators and charts in their analysis. Technical indicators are mathematical manipulations of price and/or volume data, whereby trends in the values or extreme maximum or minimum values of these indicators are monitored. With chart analysis, we are often looking for specific patterns that may indicate future price behavior. In this installment of Technically Speaking, we discuss the cup-with-handle pattern.
The cup-with-handle pattern was developed by William O’Neil, the founder of Investor’s Business Daily and developer of the CAN SLIM investment approach, which uses both fundamental and technical analysis to identify potential investment opportunities. O’Neil introduced the cup with handle in his 1988 book, “How to Make Money in Stocks.” The book is now in its fourth edition (McGraw-Hill, 2009).
As with most chart patterns, the cup-with-handle pattern derives its name from the way it appears on a stock chart: A well-formed cup-with-handle pattern resembles the profile of a coffee cup. However, the cup with handle pattern is preceded by a strong upward move, which eventually loses steam. At that point, a sell-off takes place and prices move sideways for an extended period of time. This is where the cup with handle pattern develops. The pattern consists of two distinct parts: the cup and the handle. The left side of the cup is a downtrend correcting the previous price advance. Eventually, a bottom forms and prices once again begin to advance, forming the right side of the cup. In a cup-with-handle pattern, prices will rebound to a level near the high of the left side of the cup, completing the cup shape.
Tracking the cumulative net new highs can help you identify changes in momentum as possible market reversals.