Have you ever drink tea from a special cup? The small one that you can hold with your thumb and one or two fingers. Like the
In some countries, it is custom to raise your ‘pinkie’ when drinking from a tea cup.
Do you know? In the early days of Europ’s tea craze, many people kept burning their fingers while holding the cups. So, someone in Germany invented a handle to solve that problem.
So can you guess? What does a tea cup have to do with a chart pattern?
Yes, the general shape looks like a cup with handle (CWH). What is more interesting is that many deemed that it is one of the most successful base patterns.
Why? Simple. Over the centuries, human nature hasn't changed. Greed, fear, hope, despair and other emotions drive stock prices. So do the laws of supply and demand.
That is why sifting through the CWH charts of the market's greatest winners is time well worth spent.
William O’Neil is the guy above who made CWH famous. Today, it is a common chart pattern used to find buying opportunities in the market.
Well, I use CWH to find a low-risk entry into a stock too. I jump into the trade as soon as the pattern forms and the price break the old resistance.
Don’t worry. I will elaborate later.
A perfect CWH comprises of 4 phases:
1. A prior price uptrend
4. A new uptrend
(1) Right here, the pattern shapes after the price moved up for a period.
(2) Sellers begin to take profit by offloading. The price will pull back, form a cup shape. Do you notice that the rounded bottom appearance looks like a bowl?
(3) As the price continues to climb, it pulls back to form a handle. This time, it is also more gradual.
(4) At the end of the setup, the price will start a new uptrend.
NOTE: The cup section of the pattern should be around a third to two-thirds the size of the initial move up.
In general, a prior uptrend lasts for 2 to 4 months before declining in a market correction. If it is beyond that, the bull run is too mature. The more mature the uptrend, the less chance that the stock can rally.
The depth of a ‘U-shaped’ cup is no more than 33% from the old high point. It takes about 2 to 6 months to recover to its previous high. It depends on the market condition too.
As the stock recovers and climbs on the right side of the pattern, there will be pressure to take profits. The culprits are the people who bought at or near the old high. They can cause the stock price to pull back for at least a week. The depth of the handle should be no more than 15% below the old high point.
For volume, it subsides on the left side of the cup and accumulates on the right part of the pattern. The handle will show a similar behavior for volume. You should see a significant surge during breakout above the buy point.
NOTE: The numbers above are typical. If it defrays a lot, the chance for CWH setup to fail is higher.
Here is a list for you to see if the stock with a CWH pattern has little risk to enter and profit:
1. Is the general market in a correction, bear market or bull market?
2. Is the stock in a leading sector with increasing earnings and sales growth?
3. Did the stock experience a prior uptrend before forming a CWH?
4. Does CWH look like a cup? If you have initial doubts, then it’s not a cup. And U-shaped bases are more likely to work than V shapes.
5. How much of the cup is in the upper half? A steady climb on the right side is ideal.
6. Check if it can meet the traits shown in the previous section “Characteristics’.
HOW TO TRADE WITH CWH
First, you search for a stock that has this CWH pattern.
Next, look for its handle. When the price breaks above the upper trend line of the handle, you can start to buy that stock.
The chart above shows the price break above the top of the handle. It is where you can enter the market.
If you want, you can place a stop loss below the low of the 'handle.' If the price keeps going lower, the chance for the stock to profit decreases. The chart below demonstrates why you do not want to be in such situation any longer.
Here are charts that display CWH patterns over the past years. See if you can understand by what I mean by CWH setup.
I found that many winning stocks had this formation. And it is one of the most reliable chart patterns.
But you must remember this.
All the best stocks with such chart patterns found at the start of a market uptrend. And not during, or at the end of a bull market run.
Let us do a quick run on what you have learn so far:
If you like what you have read so far, then share with your friends so that more people can learn about Cup With Handle pattern too.