Understanding Cup-and-Handle Stock Market Approach

Author: George Davis

Technical analysis is a way to predict future stock prices, but it has many shapes and forms. Read this blog post to understand the cup-and-handle technical analysis chart.

Predicting stock movement depends on fundamental and technical analysis. While the former is for institutional investors who look into a company’s financials, the latter is a graphical approach that predicts the future price of a stock. The technical analysis is commonly used by retail investors with the help of a stop-loss strategy to mark their market entry and exit points.

However, technical analysis is broken down into several parts, one of which is the cup-and-handle analysis. In this blog post, we will understand the cup-and-handle stock market approach. So, keep reading to learn more.

What Is Cup-and-Handle Stock Market Approach?

The cup-and-handle is a part of technical analysis or a shape of technical analysis that represents a cup with a handle. The cup is defined by a “U” shape while the handle is a slight decrease in the stock price. The cup-and-handle approach is a bullish curve whose formation is as short as 7 weeks and as long as 65 days. The right-hand side of the cup-and-handle approach generally experiences low trading volume, and it’s a signal for going long in the stock market.

Understanding Cup-and-Handle Technical Analysis

The cup-and-handle technical analysis chart was defined by J. O’Neil in 1988. This chart represents the selling pressure investors face when the stock price is falling. After a few investors trade-off their shares, the stock returns to its bullish state and starts rising to form a “U” shape cup. When the prices increase, investors who purchased stocks at lower prices (and formed the “U” shape) start selling their stock to make a profit. When the prior purchased stocks are sold, the cup-and-handle analysis undergoes a slight decrease and starts forming the handle of the cup-and-handle chart. This process is continued until an unprecedented market situation disturbed the graphs formation.

Limitation of the Cup-and-Handle Chart

Like all technical analysis charts, the cup-and-handle shape has its limitations. Since the cup-and-handle chart takes significant time to fully form, it can cause late buying or selling decisions. Plus, the cup-and-handle chart itself is highly volatile as its formation duration ranges from as long as one year to as short as a few days. This timeframe is highly unpredictable and most investors avoid using this method.

Concluding Thoughts

The cup-and-handle approach is a risky bet. However, professional investors use this technical analysis to their benefit. It requires years of training in the stock market to build such deep analytical skills. However, for retail investors looking for long-term investment, online investment guides are the best way to go.

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