As the name would suggest, a cup-and-handle pattern includes an elongated U-shape followed by a short period of consolidation of one to two weeks in duration, which tends to be downtrending.
The pattern is similar in appearance to a coffee cup with a right-side handle, and indicates the potential for an uptrend.
The depth of the cup indicates the potential for a handle and subsequent breakout to develop.
The cup should be fairly shallow.
The handle tends to be down-sloping, and indicates a period of consolidation.
Consolidation occurs when the price seems to bounce between an upper and lower price limit. You can track the down-sloping angle of the handle by drawing trendlines across the upper and lower price limits. If the price ascends outside of the trendlines, then it has the potential for breakout. If the price ascends beyond the upper, right side of the cup, then the pattern is confirmed, particularly if it is accompanied by a sharp increase in volume.
Volume tends to parallel the price pattern. Consequently, during the cup formation, as price descends, volume tends to decrease. Following a period of relative inactivity (at the bottom of the cup), the price pattern starts an upward turn and volume tends to increase. During the handle formation, the volume decreases. However, you will notice an increase in volume when the price breaks out beyond the right side of the cup.
Cup-and-handles are long-term patterns that can be observed from about three weeks to several years.
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