A cup and handle pattern is indicated when the “cup” looks like a U, and the “handle” is shown with a slight downward trend after the cup forms. Low trading volumes typically find their way to the right side of this pattern, which can last anywhere from seven to sixty-five weeks. This occurs because of a downward price fluctuation followed by a period of stabilization, then a rally that brings the prices back up almost or equal to the previous level before the plummet. Once this has happened, making the U of the cup, the price drifts downward slightly forming the handle.
The handle has to be smaller than the cup and should only indicate a slight downward trend – not one that goes lower than 1/3 of the way into the cup. Investors who see a similar pattern where the handle goes deeper might want to make efforts to avoid it.
However, when the handle is of proper proportions to the cup, a breakout that goes higher than the handle is an indication of a rise in price. However, it is important to note that this isn’t always the case, and investors should use some measures to mitigate losses when putting money into these types of patterns. To learn more about the cup and handle pattern click here.