What is Cup and Handle Pattern?
The cup and handle is a bullish continuation pattern resembling a teacup, where a rounded bottom (cup) is followed by a smaller downward drift (handle) before breaking out to new highs.
Cup and Handle Pattern Explained
The cup should be U-shaped (not V-shaped) and take several weeks to months to form. The handle is a smaller consolidation that dips no more than one-third into the cup's depth. The breakout occurs when price exceeds the handle's resistance. This pattern works because it represents a gradual shift from distribution to accumulation, followed by a final shakeout of weak holders.
Real-World Example
A stock rises to $60, gradually declines to $45 over two months, then recovers to $58 (cup). Over the next two weeks, it pulls back to $53 (handle). When it breaks above $58 on volume, the pattern is confirmed with a target of $58 + ($58-$45) = $71.
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