Reblog: Why the Cup & Handle Chart Pattern Works
While my trading is more following capital flows based on trends that I measure with key moving averages there is one chart pattern that I find very useful and that has high probabilities of success.
The cup and handle pattern is a bullish continuation formation, it is one of the newer chart formations and can be easily identified on a price chart. This chart pattern was first popularized by William J. O’Neil in the first edition of his 1988 book, How to Make Money in Stocks. In order for the cup and handle setup to have the highest odds of succeeding, it should come after a clear uptrend is in place. The chart pattern consists of two key components: (1) cup and (2) handle.
The cup part of the formation is created when profit taking sets in or the market itself is in a correction and the stock sells off and forms the left side of the cup. The cup bottom is formed when the stock finally runs out of sellers at new low prices and buyers start moving in and bidding the stock back up again as sellers demand higher prices to turn the stock over. Most of the time as the stock emerges out of the right side of the cup in an uptrend it fails and meets resistance the first time it tries to break out to new high prices and the pattern forms a handle. The second run at new highs usually works as the sellers have been worked through and the stock breaks out to new highs.