What Happens After a Cup and Handle Pattern?

A cup and handle pattern is a bullish chart formation resembling a teacup with a handle, indicating a period of consolidation followed by an upward price movement. The “cup” forms after an advance, showing a rounded bottom or “U” shape, signifying a consolidation phase where selling pressure meets buying interest. Following the cup’s formation, a smaller, downward-sloping “handle” emerges, representing a brief, final consolidation before the pattern’s resolution. This pattern suggests that buying interest has absorbed available supply, setting the stage for a continuation of the prior upward trend.

Identifying the Breakout Point

The breakout point signals the transition from pattern formation to an upward trend. This moment occurs when the price closes above the resistance level established by the handle’s upper boundary. A valid breakout requires the stock’s closing price to clear this resistance, rather than just an intra-day spike that fails to hold. A close above the resistance by a small percentage often indicates conviction.

The confirmation of this breakout relies heavily on trading volume. A significant surge in volume at the moment of the breakout is important. This means volume should be at least 150% to 200% of the average daily volume, signifying strong institutional buying interest and conviction behind the move. Without this increase in volume, a price move above the resistance is unreliable, potentially leading to a “false breakout” where the price quickly reverses.

Common Price Behaviors Post-Breakout

Following a confirmed breakout from a cup and handle pattern, the expectation is for upward price movement. This initial surge sees the price quickly advance beyond the breakout level. The momentum from the breakout can carry the price higher for several trading sessions.

A retest of the breakout level is common. The price might pull back towards the former resistance line, which then acts as a new support level. This retest allows earlier buyers to take profits and new buyers to enter the market, providing an opportunity for traders who missed the initial move. This pullback occurs within a few days to a week after the initial breakout.

After an initial post-breakout surge, the price might enter a period of consolidation or sideways movement. This indicates a temporary pause in the upward trend, as buyers and sellers reach a temporary equilibrium. During this phase, the price trades within a tighter range before resuming its upward trajectory.

Volume and Momentum Trends

After a confirmed cup and handle breakout, trading volume exhibits trends that corroborate the price action. During the initial upward move post-breakout, volume should remain elevated, above average, indicating continued strong buying interest and participation. Conversely, if the price experiences a retest or enters a period of consolidation, volume should decline, suggesting that selling pressure is minimal. A significant increase in volume during a retest or consolidation period might signal a potential failure of the pattern.

Momentum indicators also provide insights into the strength of the post-breakout move. The Relative Strength Index (RSI), for example, will move into bullish territory, above 50 or 60, reflecting sustained buying pressure. A reading above 70 on the RSI can indicate an overbought condition, suggesting a temporary pause or pullback could be imminent, but does not necessarily negate the overall bullish trend.

The Moving Average Convergence Divergence (MACD) indicator shows a bullish crossover (the MACD line crossing above the signal line) and an expanding histogram above the zero line, confirming strengthening upward momentum. Sustained bullish readings on these indicators provide corroborating evidence for the price behavior. Conversely, if momentum indicators show bearish divergences, it could signal a weakening trend.

Measuring Potential Price Objectives

Projecting the potential upward movement after a cup and handle breakout uses the “depth” of the cup to estimate a price objective. To determine this depth, one measures the vertical distance from the lowest point of the cup to the level of the cup’s right-side peak, or the rim.

Once the cup’s depth is calculated, this measurement is then projected upwards from the breakout point. For example, if the cup’s depth is $10 and the breakout occurs at $50, the theoretical price objective would be $60.

These calculated price objectives are theoretical projections based on historical pattern performance, not guaranteed outcomes. They serve as a guide for understanding the potential magnitude of the move and can assist traders in setting profit targets or evaluating the risk-reward profile of a trade. Market conditions, company-specific news, and broader economic factors can all influence whether a projected objective is reached.