What it means
The cup begins when a share price falls from a high, bottoms out and then recovers in a gradual, rounded curve back to roughly the earlier high. The shape looks like the profile of a teacup, and it suggests that selling pressure has faded and buyers are returning.
After the cup, the price usually drifts down a little or moves sideways for a short period, forming the handle. The handle is typically shallower than the cup and is seen as a final shakeout of nervous holders before a move higher.
The signal traders wait for is a breakout, which is a close above the level at which the cup began, called the rim. A breakout accompanied by a clear rise in trading volume is regarded as stronger confirmation than one on thin volume.
Chart analysts use the depth of the cup as a rough guide to how far the price might rise. A common rule of thumb adds the depth to the breakout price to give a target, and a stop-loss, which is an order to sell if the price falls to a set level, is usually placed below the handle low.
The pattern has limits. It is a pattern drawn in hindsight and subjective, so two analysts may disagree about whether a cup exists.
Many apparent cups fail, and results depend on market conditions, so it should be used with other analysis and with firm limits on risk. For non-specialists, the term is useful mainly for understanding commentary.
It is also distinct from CUP, the comparable uncontrolled price method used in transfer pricing, which compares prices charged between related companies with prices for similar deals between independent parties.
In practice
Real-world examples.
Example
A technical analyst at a brokerage notes that a retailer's shares have formed a cup over four months and are now forming a handle. She tells clients that a close above the rim on high volume would be a bullish signal.
Example
A private investor sees a cup-and-handle on a software company's chart. He buys after the breakout, sets a stop below the handle low and sells half the holding when the price reaches the rule-of-thumb target.
Example
A fund manager reviews a chart that looks like a cup, but volume is falling and the market is weak. She decides the pattern is unreliable, keeps the position small and waits for stronger confirmation.
Formula
Calculation
Cup depth = rim price - cup low price
Price target = breakout price + cup depth
A share rises to $50, falls to a low of $40 and then recovers to $50, so the cup depth is $50 - $40 = $10. The price pulls back slightly to $47 in the handle, then breaks above $50. The rule-of-thumb target is $50 + $10 = $60. If a trader buys at $50 and places a stop at $47, the risk is $50 - $47 = $3 per share against a possible gain of $10, a reward-to-risk ratio of about 3.3 to 1.Case study
Seen in the real world.
Windrush Trading Club is an illustrative, fictional group of private investors who use chart patterns. They spotted a cup on an industrial company's shares, where the price fell from $80 to $60 over three months and climbed back to $80 over the following three.
Two members bought at the breakout above $80, while a third waited for volume to confirm. The price rose to $92 and then dropped back, so the target of $100 (the $80 breakout plus the $20 depth) was never reached.
The price then slipped below $76, so the members who had set stops there lost $4 per share, while a member who took profits at $90 made a gain of $10. In this illustrative case, the pattern gave a reasonable idea of where to act, but disciplined exits mattered more than the shape.
Watch out
Common mistakes.
- Buying in the middle of the handle before any breakout, when the price may continue to fall.
- Ignoring trading volume, which helps to show whether the breakout has real support.
- Treating the pattern as a prediction, when it is only one input and often fails.
Questions
People also ask.
What is a cup and handle pattern?
It is a chart pattern with a rounded dip (the cup) followed by a small pullback (the handle), which some traders read as a sign that a rise will continue.
Is a cup the same as CUP in transfer pricing?
No, CUP is an abbreviation for the comparable uncontrolled price method, a tax technique for testing whether prices between related companies are fair.
How long does a cup take to form?
It can take several weeks or many months, and longer, more rounded cups are generally thought to be more reliable than sharp V-shaped dips.
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