Cup and Handles
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     julles
Member
Username: julles
Post Number: 1680
Registered: 01-2003
Rating: 
Votes: 1
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| | Saturday, April 29, 2006 - 11:22 pm: |  
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After seeing so many proclamations of Cups and Handle formations recently, I asked Colin his thoughts on it and I respect my own. So I've posted here a definite guideline of what could be Classified as a 'True Cup an Handle Formation.'
The Cup with Handle is a bullish continuation pattern that marks a consolidation period followed by a breakout. It was developed by William O'Neil.
1)Trend: To qualify as a continuation pattern, a prior trend should exist. Ideally, the trend should be a few months old and not too mature. The more mature the trend, the less chance that the pattern marks a continuation or the less upside potential.
2) Cup: The cup should be "U" shaped and resemble a bowl or rounding bottom. A "V" shaped bottom would be considered too sharp of a reversal to qualify. The softer "U" shape ensures that the cup is a consolidation pattern with valid support at the bottom of the "U". The perfect pattern would have equal highs on both sides of the cup, but this is not always the case.
3) Cup Depth: Ideally, the depth of the cup should retrace 1/3 or less of the previous advance. However, with volatile markets and over-reactions, the retracement could range from 1/3 to 1/2. In extreme situations, the maximum retracement could be 2/3, which conforms with Dow Theory.
All 1/3 1/2 2/3 measurements can and should be measured on percentage based maths.
4) Handle: After the high forms on the right side of the cup, there is a pullback that forms the handle. Sometimes this handle resembles a flag or pennant that slopes downward, other times just a short pullback. The handle represents the final consolidation/pullback before the big breakout and can retrace up to 1/3 of the cup's advance, but usually not more. The smaller the retracement is, the more bullish the formation and significant the breakout. Sometimes it is prudent to wait for a break above the resistance line established by the highs of the cup.
5) Duration: The cup can extend from 1 to 6 months, sometimes longer on weekly charts. The handle can be from 1 week to many weeks and ideally completes within 1-4 weeks
6) Volume: There should be a substantial increase in volume on the breakout above the handle's resistance.
7) Target: The projected advance after breakout can be estimated by measuring the distance from the right peak of the cup to the bottom of the cup.
I've found anything forming a Cup and Handle while it's bottoming just dosen't cut the criteria and it fails to satisfy dreams.
Always be alert for the True Cup and Handle formations
Always in a uptrend. Julles
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ingot54
Member
Username: ingot54
Post Number: 1397
Registered: 05-2004
Rating: N/A
Votes: 0
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| | Sunday, April 30, 2006 - 07:50 am: |
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Thanks Julles. That was the clearest explanation I have heard.
Have often looked at what I thought was a C & H but after reading your post, I am sure the true pattern is quite specific, rather than "that's good enough - she'll be right" approach.
Keep Smiling
Trading style :CFD's predominantly. Looking for ways to enter CFD trading over long term.
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suemac
Member
Username: suemac
Post Number: 332
Registered: 01-2003Rating: N/A
Votes: 0
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| | Sunday, May 07, 2006 - 11:04 am: |
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Just thought I'd post contenders as they appear. Have seen several over the last month or so, but regrettably my memory doesn't last that long!!!
Behold the turtle; he makes no progress unless he sticks his neck out!
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paddy_one
Member
Username: paddy_one
Post Number: 81
Registered: 07-2005Rating: N/A
Votes: 0
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| | Sunday, May 07, 2006 - 01:54 pm: |
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Suemac, I agree with you on TOX, & have been watching this for quite some time now. However I am calling the current development an ascending triangle.
Julles, while I agree with your definition of a cup & handle I can't agree that they always occur in an uptrend even though I know this is technically how they are described. I see them regularly on IPO's where there has been no previous price action, and I regularly trade rounded bottoms as a cup & handle. I like to see a handle that you can draw two parallel lines in a down trend (as per Guppy's definition of flag-like), but I have seen some very nice ascending triangles too as currently showing on TOX. I suppose you could argue it's not a cup, just a saucer with a bit of sideways consolidation, but I can't see any difference in how I would trade them. As a trader who primarily trades only this pattern, I think you would miss an awful lot of opportunities by only ever sticking to cups firmly implanted in an uptrend. TOX does not meet your definition of a cup & handle as it is not in an uptrend. It is a very long rounded bottom reversal and hasn't changed the way I have traded it.
Just my observations.
Paddy
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julles
Member
Username: julles
Post Number: 1699
Registered: 01-2003
Rating: N/A
Votes: 0
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| | Monday, May 08, 2006 - 06:09 am: |
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That's fair enough I was just being politically correct with the definition of a cup and handle.
I too see tox as a rounding bottom I hope you both make a successful trade with it.
Julles
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