The Cup and Handle in Foreign Exchange

Technically you have an extension of a bullish pattern; it marks a consolidation period then an accompanying breakout. The period cup and handle assumes nearby are two sections to the shape.

The cup evolves after an advance, it appears like a bowl, the cup is completed, and a trading pattern develops that has a limited range. With time the handle is formed. The ensuing breakout from the handle's trading range indicates an extension of the previous run higher.

Why Does It Happen?

Similar to the double top, the cup and handle develops usually with sentimental or popular stocks that have surged higher to a new high following positive market sensitive information. As the share price rises, the investor is contented in paying the higher market price but eventually the demand waivers and the stock price lingers lower, the experienced traders begin to lock in their profits. While the stock is supported by good fundamental prospects, the investors start to doubt the share price and its value. The share confirms a top and a sell off begin (top 1).

The share price suffers a large drop of up to 20 percent from its latest high. If this condition occurred during a bear market losses might stretch up to 50 percent. Opportunistic investors and speculators attempt to pick the undersurface and acquire into the stock, sooner than most. The share price steadies and a reaction low are established. Interest in the stock grows and the share price rises. It prevails a variety of attention from the media, gets on the radar of some analysts and shortly after the research analysts demonstrate positive ideas to the market. A new rally begins to evolve, market sentiment improves and buyers who have held the stock since the recent high are getting ready to close out their trades. They have been held out of the market because they didn't want to lose on a trade; again pride has something to do with not exiting the trade earlier. They are not persuaded into holding their positions upon hearing new bullish reviews; they just want to move on.

As the stock price overtures the old high at top 1, the traders who bought in at the first new high begin to deal rapidly, trying to protect their trading capital. A second top evolves which is well defined (top 2). This creates a significant U shaped pattern; as a result we have a CUP shaped pattern.

We now have a defining resistance high at top 1 and 2. The opportunists speculate the market and decide to short the stock. An interesting reflection from a proficient point of view of the pattern begins. There is a possibility that if stock prices fall dramatically and the volume of sellers increase, we could have a double top eventuate. But the volume subverts and the stock holders reign at this moment in time.

Shortly after the share price moves up convincingly on supporting news that the research houses release to the market. The stock price rallies to a new high as the short positions have to be covered along with new establish sureness; the inflow of positive news is overwhelming. This has created a small U shaped pullback and is commonly known and the handle in this pattern. Short positions that were not covered originally are now under pressure, the volume has increased on the positive news to the markets from the media and research houses and the share price is billowing. Over the coming weeks the stock now trades at considerably new highs.

Technical Signal

1. Trend: an established trend should be maintained in order to qualify as a continuation pattern. The trend should cover a number of months but not advance. The more mature the trend; the pattern will be misleading and not show any further potential.

2. Cup: the cup would preferably have a nice radius curve and resemble a bowl and have a rounded base. The smoother the bottom of the pattern the better the confirming support. The optimum pattern would have highs of equal support on both sides of the cup, although this is not always possible.

3. Cup Depth: Preferably, the retracement should be 1/3rd or lower than the recent high. In some situations where volatility is high, the retracement might be as much as 2/3rds. Generally in this extreme 2/3rds would be the utmost retracement.

4. Handle: following the second high, there is a nominal pullback that forms the handle. On occasions the handle gives the impression of a pennant or flag that falls away. Most handles are just a quick pullback. The handle portrays the final consolidation or pullback before a strong breakout rally to the upside. This can rally up to one third of the cup advance but generally never anymore. The smaller retracement, and the more aggressive the formation, the more important the breakout. It would be advisable at this stage to be cautious to wait for a break above the established resistance high of the cup.

5. Duration: the first phase being the cup shape could take up to six months to found, sometimes even longer on wider charts like weekly ones. The handle could acquire from one week to about one month.

6. Volume: volume generally should be significant once the stock price breaks over the resistance high or handle's immunity.

7. Target: a good estimate of the projected new stock price after the cup and handle is calculated by measuring the distance from the second top (top 2) to the base of the cup. You then add this frame to the breakout point which will be the mark.