The Cup and Handle pattern, proposed by investment master William O'Neil, occurs during an upward trend in the stock market. Initially, there is a surge in the stock price, followed by a volume contraction and a pullback. Then, the stock price rises again with increased volume, reaching the previous high point, after which it contracts again with reduced volume, and finally, it rises again with increased volume, creating a cup-shaped pattern with a handle. When the price breaks through the handle, it signifies the beginning of a significant uptrend.

Detailed Explanation of the Cup and Handle Pattern

The Cup and Handle pattern is a bullish continuation pattern. As its name suggests, this pattern consists of two parts: the cup bottom and the handle. The cup is formed after a period of increase and resembles a round cup bottom. After the completion of the cup bottom part, a period of consolidation occurs, which is the handle. Once the handle's consolidation is broken, the price will continue the previous upward trend.

1. Trend: As a continuation pattern, the trend before the Cup and Handle pattern is an upward trend. Ideally, this upward trend should last for several months and still be in the early stages of the trend. The more mature the previous upward trend, the lower the success rate of this continuation pattern.

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2. Cup: The shape of the cup should be U-shaped, resembling a round bottom. A V-shaped bottom is too abrupt for the Cup and Handle pattern. A gentle U-shape can confirm that the "cup" is a consolidation phase. In an ideal case, the heights on both sides of the "cup" are equal, but this is not usually the case.

3. Cup Height: Ideally, the depth of the cup should be 1/3 of the previous upward trend's retracement, or less. For volatile markets, this retracement can be between 1/3 and 1/2. In extreme cases, it can reach 2/3.

4. Handle: Sometimes, the handle appears as a downward-sloping flag or small triangular pattern, and sometimes it is just a simple small pullback. The pullback of the handle can reach 1/3 of the cup's rise height, and it is best not to exceed this range. The smaller the pullback of the handle, the more bullish the pattern is, and the more significant it is when breaking through.

5. Time: The formation time of the cup can be 1 to 6 months, or longer. The time for the handle is 1-4 weeks.

6. Trading Volume: When the handle breaks through, there should be a noticeable increase in trading volume.7. Target Price: The target price can be the distance from the bottom of the cup to the peak of the wave on the right side of the cup.

Like other patterns, the most important thing is to grasp the essence of the pattern, not the details: In the cup and handle pattern, the cup is a bowl-shaped consolidation phase, and the handle is a small pullback, followed by a breakout with increased volume.

Cup and Handle Pattern Buy Point

The buy point of the O'Neil Cup and Handle Theory is, in simple terms, when the stock price rises with increased volume and is about to set a new high, it is the best time to buy. The essence is that the main force, near the previous high point, takes the initiative to adopt a washing behavior considering the pressure of the trapped plates at the previous high point, in order to go further and pull higher.

Master O'Neil pointed out: In the pattern of "a cup with a handle", the correct buying time is when the stock price rises to a point 1/8 higher than the highest price of the handle area (points C, D, E). Although we call this point a new high point, it is actually a new high point that breaks through the handle trading area, which is usually slightly lower than the actual past high point (point A).

Why not buy at point B? Why can't you buy at the bottom of the cup-shaped area (point B, also known as the "bottom of the pit")? Wouldn't this result in greater profits? This is because, in addition to this "cup with a handle" pattern - that is, the "single bottom" pattern, there will also be "double bottom" and "triple bottom" patterns. As shown in the following figure, the "double bottom pattern". If you buy at the first low point B, there may still be a second low point D. So, can you buy at the second low point D? No, because there may still be a third low point - the "triple bottom pattern", or even many bottom patterns: sometimes it can even form a long consolidation. Some stocks, once they start consolidating, can even consolidate for a year or several years.

So we do not advocate buying at a low position for two reasons:1. When buying at a low position, we do not know whether the stock will continue to decline, so we must wait for more reliable technical signals to indicate that the stock price has indeed stopped falling and is about to rise significantly before buying again.

2. After buying at a low position and the stock price lingers at the low level, the technical side cannot prove that it will rise significantly in the future. At this point, the stock bought may not be a very good one.