TECHNICAL ANALYSIS

PREDICTING SHORT-TERM TRENDS:

THE CUP-WITH-HANDLE PATTERN
By Wayne A. Thorp

The cup-with-handle Price charts are one of the most widely used tools in technical analysis.
What do charts reveal? One item technical analysts like to look for is repeat-
is a bullish ing patterns—these can be used to forecast future price movements and, in
continuation pattern some cases, the potential magnitude of such movements.
that is formed by a This article examines a price pattern identified by William O’Neil, founder
corrective movement of Investor’s Business Daily—the cup-with-handle pattern.
in price—the
CANSLIM
handle—which
follows an upward In addition to his role as a publisher, William O’Neil is well-known for his
trend in prices. CANSLIM investment approach, which uses both fundamental and technical
During the formation analysis to identify potential investment opportunities. [O’Neil’s CANSLIM
of the handle, heavy approach is outlined in his book “How to Make Money in Stocks,” McGraw-
Hill Company; 272 pages; $10.95.] Beyond the more concrete criteria that
volume is key. make up CANSLIM, O’Neil looks for stocks that are exhibiting specific
patterns, the most common being the cup-with-handle pattern.

PATTERN SHAPE

As with most chart patterns, the cup-with-handle pattern derives its name
from the way it appears on a stock chart—a well-formed cup-with-handle
pattern resembles the profile of a coffee cup. The pattern consists of two
distinct parts: the cup and the handle. Figure 1 provides an illustration of a
recently formed cup-with-handle pattern for Winnebago Industries.
The cup-with-handle pattern is a bullish continuation pattern that is formed
by a corrective movement in price following an upward trend in prices. In the
Figure 1 chart for Winnebago, point 1 indicates the beginning point of the
upward movement in price that preceded the cup-with-handle pattern. At this
point—November 10, 2000—the general downtrend that had been in place
from March of that year bottomed out when the price closed at $10.75.
Between points 1 and 2, the price of Winnebago rose almost 76% to close at
$18.88 on January 18, 2001. As it became apparent with time, this January
price point forms the left edge of the “cup.”
After reaching a high of $18.88 on January 18 (point 2), the price of
Winnebago declined and tested the price level just below $16 on three occa-
sions (a decline of just over 15% from the January 18 high), forming the base
of our cup (from points 2 to 3 on the chart). Between points 3 and 4 we see
that the price rose to retest the high set back in January, eventually closing at
a high of $18.70 on May 2 (point 4). Point 4 is called the buy, or breakout,
point, because this is the price level that must be broken in order to complete
the cup-with-handle pattern. The rounded U-shaped price pattern between
points 2 and 4 forms the cup portion of the pattern.
Having identified the cup, where’s the handle? This is formed by a “minor”
price correction or decline once the right edge of the cup is formed. This dip
in price is usually attributed to the selling by those who bought at the last
high that marked the beginning of the cup and are looking to get out, as well

Wayne A. Thorp is associate financial analyst at AAII.

AAII Journal/August 2001 31

TECHNICAL ANALYSIS

FIGURE 1. WINNEBAGO INDUSTRIES’ interest in a stock. One

CUP-WITH-HANDLE PATTERN indication that institu-
tional money is flowing
into a stock is trading
volume that is signifi-
cantly above its average.
Specifically, O’Neil
Share requires that volume at
Price the breakout be 50%
above its 50-day average
for trading volume.
Another indication of
institutional interest is
stronger volume on days
the price increases versus
those days where the
Trading price decreases.
Volume In Figure 1, the bars in
the lower portion below
the price chart represent
the daily trading volume.
The dotted line running
almost horizontally
as by those selling at the previous ues. For Winnebago, the price through these bars is the 50-day
high who bought at the lows of the springboards to 64% to close at a average for volume; O’Neil looks for
cup. In Figure 1, the price slid high of $30.75 on June 29. volume to exceed this line by at least
almost 5% between points 4 and 5 50% once the breakout takes place.
to close at $17.80 on May 14 (point VOLUME Early on in the formation of the
5). Once again the price rebounded, cup in Figure 1—just after point 2
and less than two weeks later it Volume is another critical factor in on the chart—there is a general
returned to the levels set at both the technical and chart pattern analysis. decline in trading volume, as illus-
left and right sides of the cup, at In the CANSLIM approach, the “S” trated by trendline “A” drawn along
which point it meets some resistance. stands for sponsorship—institutional the tops of the volume bars. This
Finally, on May 31
(point 6), the price
closes above the FIGURE 2. KCS ENERGY’S
high set at the left CUP-WITH-HANDLE PATTERN
side of the cup. As
mentioned earlier,
the price closing
above the highs
established at the
right and left sides Share
of the cup is an Price
indication that a
breakout is taking
place. This is the
point at which you
would go long (buy)
the security. Two
things can happen:
The breakout falls Trading
and the price falls Volume
back below the
previous highs, or
the upward price
movement contin-

32 AAII Journal/August 2001

 TECHNICAL ANALYSIS

decline in volume FIGURE 3. ADVO’S V-SHAPE:

occurs because selling WHEN THE CUP BREAKS
pressure is subsiding
as fewer and fewer
investors wish to sell
their shares. During
this period—from
January 19 through
the end of Febru- Share
ary—the daily Price
volume exceeded the
50-day average
volume only twice.
At the base of the
cup—March and
early April of 2001—
there is a significant
increase in volume, Trading
as buyers and sellers Volume
do battle to see who
will wrest control of
the stock’s price.
Finally, buyers begin
to prevail and the price turns upward substantial run up of 225% in its average volume. However, the
to form the right side of the cup. The price between the November 29, length of the handle could cause you
trendline “B” shows the general 2000, close of $2 and the closing to be skeptical of the breakout’s
increase in volume during the final price of $6.50 on February 2, 2001 validity. The handle formed over
portion of the cup. (points 1 and 2). The cup that five trading days, which is at the
It is during the formation of the subsequently formed between short end of the one- to four-week
handle that volume is key. Beginning February 2 and April 17 contained length that most technicians look
at point 5 on the chart through the an excellent basing pattern (point 3), for. As it turns out, the price
breakout that takes place at point 6, where the price tested the $5 range movement over the next few days
there is a tremendous increase in on several occasions before rising to proves that this was not the
daily trading volume, as illustrated form the right side of the cup, which breakout. Instead, the price retreats
by trendline “C.” More important is is only slightly below the high at the a second time to close at $5.97 on
the fact that most of the bars during left side of the cup. By testing the $5 May 3 (point 7). Here, note that the
this period are well above the 50-day level without any prolonged ven- price does not make any serious
average volume—a clear indication tures below it, you can reasonably movement below the previous low
that institutional money is flowing assume that a solid support level has of April 20. Had the price fallen
into Winnebago stock. The highest been formed. well below this level, you would
volume bar on the chart appears on As expected of a cup-with-handle have been forced to question
June 5 (shown by the arrow), the day formation, the price retreats from whether all of the selling pressure
after the price closed above the high the high of $6.33 reached on April had been wrung out. Furthermore, if
set on January 18. On this day, 17 (point 4) to form what turns out the price had fallen into the lower
345,500 shares of Winnebago were to be the first of two handles for half of the cup, this would have
traded—almost 475% above the 50- this pattern. This first correction served as a serious red flag as to the
day average trading volume of lasts three days, as KCS closed at validity of the cup-with-handle
60,100 shares. This provides an $6.08 on April 20 (point 5), at pattern.
indication that the upward price which point the price rebounds to With the pattern still intact, you
trend could continue—which in fact close at $7 on April 25 (point 6). At can see that the price begins another
it does. this juncture, you may think that upward climb to close at $7.75 on
the breakout has taken place, since May 9 (point 8)—again above the
KCS ENERGY the price has closed above the highs highs of the two cup sides. In
set at both the left and right sides of addition, volume has taken a
Figure 2 provides another example the cup. Furthermore, the trading tremendous jump, with 2,220,800
of a cup-with-handle pattern, this volume for the day—650,100—is shares traded on this day—657%
time for KCS Energy. KCS enjoyed a over 235% above the 50-day above the 50-day average volume.

AAII Journal/August 2001 33

TECHNICAL ANALYSIS

CUP-WITH-HANDLE AT A GLANCE
Here is a brief outline of the characteristics of a “typical” cup-with-handle pattern.
Keep in mind, however, that not all cup-with-handle patterns will follow these “rules.”

TREND Depth: The price should not decline too Depth: As was the case with the cup,
In order to classify the cup-with-handle far in relation to the high that set the left the shallower the handle the better; the
pattern—a continuation pattern, there side of the cup; ideally, the price should retracement that forms the handle
must be a trend in place to continue. The not retreat more than one-third from this should not be more than one-third of the
typical “lead-in” to the pattern lasts a high. In extremely volatile markets, you cup’s depth, but at most, one-half; the
few months; the more mature the may see retracements of up to two-thirds handle should not extend into the lower
uptrend prior to the cup-with-handle from the initial high. In general, the half of the cup.
developing, the less apt price is to shallower the cup the better.
continue the upward movement once the THE BREAKOUT
breakout takes place. Retest: Like most price patterns, The breakout takes place when the price
identifying them involves some subjec- exceeds the highs of the left and right
THE CUP tive interpretation on your part; with the sides of the cup; most use the closing
Shape: The cup should resemble a cup, cup-with-handle pattern, the price does price as the relevant price value.
meaning it should have a rounded not have to reach the level of the high
bottom or “U” shape; a well-developed set at the left side of the cup. In some VOLUME
U ensures that there is sufficient support cases, the high of the retest can exceed Volume plays an extremely important
at the bottom of the cup. Ideally, the the previous high. The farther the retest role in price patterns; price movements
sides of the cup are of approximate high is below the previous high, the on low volume tend not to sustain
height, but this is not necessarily a more significant the breakout needs to themselves. At breakout, the minimum
requirement. be in order for us to be confident that volume typically looked for is that which
this is a true cup-with-handle pattern. is 50% above the 50-day average
Length: The typical cup-with-handle volume.
chart pattern forms over three to six THE HANDLE
months; the pattern can be up to 12 Length: Typically, the handle will form PRICE TARGET
months in length during bear markets over a period of about one to four Once the breakout takes place, you can
and as short as one month during bull weeks; here too, however, the longer the project the upward price move by
markets. As a general rule, the longer handle, the stronger the expected price measuring the distance between the
the cup, the stronger the price move move at breakout. right peak, or high, of the cup to the
when the breakout occurs. bottom of the cup.

The substantial rise in volume, along · A handle that falls too far into the months, the price rose 160% to
with the fact that this handle formed cup—into the lower half, and close at $44.69 on August 14, 2000
over 10 trading days, provides more · A cup that is more V-shaped than (point 2). In hindsight, we could
solid proof that the breakout from U-shaped. have viewed the length of the lead-in
the cup-with-handle pattern has as a possible red flag—ideally, this
taken place. As it turns out, the price THE “V” CUP should be between one to four
takes a very short breather before months. The longer or more mature
ultimately rising almost 46% to Ideally, when a cup-with-handle the lead-in trend, the less likelihood
close at $10.20 on May 22 (point 9). forms, the cup will have a “U” of the pattern developing.
shape to it. O’Neil points out that Between points 2 and 4 in the
WHEN THE CUP BREAKS when the cup is more “V” shaped, figure, the price makes a distinct
there is less of a chance that “V” pattern—unlike the cup-with-
As is the case with all chart breakout will be successful. handle patterns illustrated in Figures
patterns, you will run across in- Figure 3 shows a chart for ADVO, 1 and 2, there is no rounded bot-
stances when a cup-with-handle in which the price formed a “cup” toming pattern, which shows a level
pattern appears, yet the expected with a distinct “V” shape followed where buyers consistently outnumber
results do not carry through. Some by a handle. sellers. Here, the price falls to close
of the more common warning signs The upward trend (with a few at $31.50 on October 5, 2000 (point
that a cup-with-handle pattern will breaks along the way) leading into 3) and then advances up to close at
not ultimately carry through include: the pattern began at point 1 on $46.50 on December 5 (point 4).
· A lack of volume support at the November 22, 1999, where the price From there, ADVO’s price forms an
breakout, closed at $17.19. Over the next 10 apparent “handle,” with the price

34 AAII Journal/August 2001

 TECHNICAL ANALYSIS

retreating to $43 on December 14 resistance (point 7). Finally, the many other chart patterns, can
(point 5), and then rising back to sellers take over as the price falls provide investors with insight into a
$46.75 on January 3, 2001 (point 6). back to the low set at point 3. myriad of investment decisions,
At this point, you are faced with a including when to enter, the direc-
difficult decision: the price has CONCLUSION tion in which to trade, and poten-
closed above the highs set at points tially, when to exit a trade. How-
2 and 4, and the volume for the day In the short term, individual ever, diligence is required to make
(219,600 shares) is more than 130% securities and the overall market are sure that the pattern you think is
of the 50-day average volume. driven more by investor emotions. forming actually does follow
However, the length of the lead-in Chart patterns, most of which are through. For this reason, it is highly
trend and the shape of the “cup” short-term in nature, capture this recommended to study the mechan-
should make you hesitate to buy. As investor psychology. They reflect the ics of various chart patterns before
the chart shows, the price begins to fact that, when faced with similar risking actual capital. Once you
collapse, first by closing below the situations or circumstances, investors become more versed in these tech-
low of the “handle.” Furthermore, will behave in the same manner niques, they could become a useful
the price is unable to achieve the again and again. addition to your investment
levels previously attained, as the low The cup-with-handle pattern, like strategy. ✦
set at point 5 becomes a level of

RESOURCES

Kuhn, Gregory. “The Cup-With-Handle Pattern,” Technical Analysis of Stocks and Commodities; V13:3.
Martinelli, Rick and Barry Hyman. “Cup-With-Handle and the Computerized Approach,” Technical Analysis of Stocks and
Commodities; October, 1998.
Kuhn, Gregory. “Trading With The Cup-With-Handle,” Technical Analysis of Stocks and Commodities; July 1995.
O’Neil, William. “How to Make Money in Stocks,” McGraw-Hill.
Daily Graphs from Investor’s Business Daily, www.dailygraphs.com.

• An article explaining the approach and how to implement it,

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For other articles on technical analysis and charting, use the Search tool.
For more on William O’Neil’s CANSLIM approach, visit the Stock • Click on Advanced Keyword Search,
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AAII Journal/August 2001 35