Take a look at the Cup and Handle Pattern
It is a reversal pattern and also a continuation pattern.
When you look at the bars, in a way, create this rounding movement in a stock. Then what you’ll do is it’ll pull back slightly and eventually go out and break out into higher prices.
If you’re looking at this on a tick basis, you’ll get this movement that’s a little bit up-and-down, but it’s rounding the bottom.
When you’re looking at the resistance level of this stock, you’re taking these swing points of where this goes. You’re making a look also of where the end of the cup goes and then what you have here is this little pullback of the handle.
That’s what creates this cup and handle pattern.
Initially, the trend could be from lower prices, and it could come up. Then you’ll pause, and then you move higher, but it could also come from higher prices. Eventually, to change direction and go into higher prices, it starts, and it becomes a reversal pattern.
If you’re starting from higher prices and then you pull back, you round out, you pause. It’s a digestion pattern, and then it moves higher, that would be a reversal pattern. A continuation pattern is you’re starting at lower prices, and you’re moving higher then the stock needs to pause. You pause a bit, you create this rounding cup and handle pattern, and then you move higher again.
That’s what it looks like as far as just the basic cup and handle pattern is concerned.
When we look at the volume
Typically, you have the right amount of volume. Initially, right so this is high or strong volume, whether you’re moving in an upward or downward. You have a reasonably strong volume because that’s what creates kind of the move.
Eventually, that volume slowly starts to decline here in this cup and handle area. But, as you start moving in the next direction, sometimes you’ll see a little bit of increase in volume picking up because you’re just going to begin to move to that next breakout point. When you look at this pullback of that handle, you’ll see probably light or weak volume as well. And then again, as you move into higher prices and breakout, you’ll probably see some more strong volume.
Sometimes, that strong volume can be more accelerated and just slowly gets there. Other times, it can just pick up very quickly because you’re breaking above this resistance level.
Your entry points would usually be here. The standard is right above that resistance level. So that’s the entry point. You could go ahead and get it as if you draw a descending trendline on this handle part. You could create an entry point here, but that’s an early entry point in that area just because you don’t know if it’s going to continue moving lower.
If you’re going to look at a projection
The projection is from that resistance level or that swing point down to that base of the cup. You could take that and go from that next level of resistance up to the top, and this could be your target of where that stock could move.
That’s a projection.
You can see the pattern is not too complicated. All it does is slowly digest in a way it’s like a sideways pattern. You’re just moving sideways to digest the move.
The difference is you sometimes have some buyers coming in from looking at value. Then, other sellers are slowly selling, so there’s not a lot of intense action in any direction. That’s why it’s just a soft cushiony found an area rather than booms like a quick bounce or an immediate rejection. Instead, it was much smoother and cushioned because there’s not a lot of enormous action or news that happens.
If we look at it the opposite approach, an inverse cup and handle or an upside-down version
You also have the same thing that can happen right here as you have this upside down bowl, you have that movement there and then a further lower in prices sell-off.
This one is also very similar to the previous one. You have your support point here. Your entry point would be a break in this support so that would be your entry area, your target and projection are also from that tip or the bottom. Let’s say this is our base and you go there you move that over. You’re looking at a target in this range for the stock.
Volume, also very similar. Strong on the brakes. Breakdowns when there are massive movements. This one could even come from higher prices or lower prices.
Typically, it’ll move this one when you see that cup and handle upside down. You see that rounding top, and then it rolls over a reversal pattern. I’ve seen it more of a reversal pattern than a continuation pattern. It can be both.