Cup and Handle Pattern: Rules, Examples and Success Rates

Last Updated on June 11, 2021

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A cup and handle pattern, or a price chart showing a concave curve followed by a smaller downward drift as a handle, has long been regarded by technical stock analysts as a bullish indicator.

As the word “cup” may suggest, the first part of the pattern should be a gentle down-and-up move, not a sharp one, a “U” rather than a “V.”

Not Sure What We Mean? Here Are Some Examples of a Cup and Handle Pattern …

One classic example played itself out over 2Q – 4Q of 1999 in the stock price of Jabil Circuit, Inc. (NYSE: JBL), a Florida based electronics and mechanical products manufacturer and designer.

Coming into this period, Jabil had seen a long bull. At the end of June 1998, a share of its stock had been worth $8.27. That number was $18.63 by the end of that year. Then on May 18, 1999, just before the cup and handle pattern starts to show up in the charts, JBL closed at $26.88.

This is, so to speak, by the rules. A cup and handle is a “continuation” pattern. It illustrates that a bull market has reached a certain age, is ready to take a breather, and will then resume. Or the pre-cup chart illustrates why some of those who had invested in JBL were ready to take their profitable exit.

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A cup and handle is a “continuation” pattern. It illustrates that a bull market has reached a certain age, is ready to take a breather, and will then resume. Photo credit: Shutterstock.com

From mid-May until early August, those investors took their money off the table, and there was a price wave down to below $20. The bull was adequately rested. In the paradigm situation, the decline to the bottom of the cup represents one-third of the previous advance.  The price started to rise, and by early October it got as high as $28, above the mid-May level. Then came the “handle,” which in this case took the form of a short price channel, within the top half of the established cup. Over the course of October, back down the $24 and up to $28 again. At this point the market was ready for a breakout.

And a breakout is what happened. JBL ended the year at $36.50. On March 10, 2000 JBL closed at above $44.

Another real-world example of the cup and handle pattern played out over a broader period of time, and involved Wynn Resorts, Limited (NASD: WYNN). After a steady rise from 2002 until 2007, WYNN reached $154. It entered into a decline there, reaching the bottom of the “cup” only in 2009, then rising and getting back to its 2007 level in 2011. There was a pullback handle. Then, in October the breakout: a 90 point rise over five months in 2013-14.

Stop Loss and Reward …

The cup and handle pattern provides its own stop-loss hedge. A trader who sees a cup and wants to benefit from the breakout will first wait for the handle to form, then will place a stop-loss order at the lowest point of the handle. If the pattern proves misleading and a downward move follows, this will limit the trader’s risk.

For example, assume a cup has formed in XYZ stock between $550 and $500. If this is going to be a cup and handle, the handle’s downward move won’t go further than $525.  Once that happens, the stop-loss order can be placed there. The stop-loss constitutes the “risk” part of the calculus, the target represents the “reward” part.  Our our hypothetical the height of the cup is $50. A trader may simply add that number to the top of the cup to derive a target. In that case, she is targeting an XYZ price of $600. She can happily close out the position with a profitable trade when she gets there.

Not all cups are symmetrical. A trader might want to act on a cup and handle pattern in which the first lip of the cup is somewhat lower than the second. In this situation, she can measure the height of the cup according to either lip, looking for a more or a less aggressive target.

Also, as a final rule for those who wish to try the cup and handle pattern: the handle should take five trading days to form, as a minimum. As our two examples dramatically illustrate, this pattern can form are very different time scales, so although five days is a minimum, a handle may be in creation for weeks or months.