If you’ve never heard of a “cup and handle pattern” you’re not alone – it’s one of the most often missed technical setups out there. But this unique continuation pattern can lead to gains that shouldn’t be missed… That’s why it’s essential to know how to spot one.

As with any pattern, it helps to know exactly what the components of a cup and handle pattern are. Before you can have a completed cup, you need to start off with the left side of a cup – usually a pulling back chart action.  Then comes the bottom of a cup, which is horizontal consolidation. And finally, the right side, which is a reversal back to the upside. All in all, this pattern forms a rounded bottom, much like its namesake.

The handle is an equally important component. It’s a small pullback that occurs before a significant upside rally.

As with any advanced technical pattern, spotting a cup and handle pattern takes some practice. But once you’re able to spot this pattern with some certainty, it can lead to some predictable profits in a very short time frame. Take a look at this example: 

While Cynosure (NASDAQ: CYNO) didn’t exhibit the prettiest cup and handle, it was nonetheless a very effective pattern. In July, shares of the medical equipment company started their pullback, they consolidated into August, and they formed the right side of the cup for the next two weeks. The pullback into September formed the handle, and eventual rally from $32 to $38 per share.

Often, cup and handle setups stem from other patterns – like a head and shoulders pattern. Let me explain…

Right now, we’ve got a potential head and shoulders pattern forming right now in the S&P 500. So far, the index has formed a left shoulder and head – and we’re waiting on the formation of a right shoulder at present. Here’s how that pattern could play out:

Should we get a summer rally to form the right shoulder of the head and shoulders pattern, the markets will really be allowing stocks to work their way up the right side of a cup just about the time the rally in the market is finishing its move.

In other words, there’s real potential that we’ll see a cup and handle pattern push stocks higher before making them move markedly lower. That gives us some interesting swing trade potential in the short-term.

To give you a clue as to what that would look like let’s revisit our example above after it put in the traditional cup and handle breakout.

Notice how each example after it staged a right side of cup crossover it made a run to retest their highs and then failed? It’s what we want to be on the lookout for when the summer rally ends and the right shoulder of the head and shoulders top in the market completes itself.

I’ll be watching closely to keep you filled in on what’s going on…

Sincerely,
David Grandey
AllAboutTrends.net
Penny Sleuth

June 15, 2010

David Grandey

David Grandey is the founder of All About Trends, an email newsletter service revealing stocks in ideal set-ups offering potential significant short-term gains.  A successful canslim-based stock market investor for the past 10 years, he has worked for Meriwest Credit Union Silicon Valley Bank, helping to establish brand awareness and credibility through feature editorial coverage in leading national and local news media.

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