A cup with handle base roughly looks like a half circle open to the upside (the cup) and then a lateral and slightly lower ‘handle’ where the stock fades from the right lip of the cup (the fade is measured by the intraday lows). In rising markets this pattern has produced a lot of winners for us over the years. Basically it is just another accumulation pattern that weeds out those that bought it at the peak (the left lip of the cup) through a process of pulling back in price as well as the time to form the base. The final stage of ‘weeding’ occurs in the handle. After the stock looks as if it is going to move past the old high at the left lip of the cup it stalls and starts to fade once again. Concerned the stock is going into another swoon, the last sellers that just want to get their money out of the stock go ahead and sell out. If volume stays low during the handle shakeout we know the selling is light and we can have an upside breakout.
You have to be patient, however, and wait for the stock to show you it is ready. That means the right buy point. To calculate a buy point for a cup with handle pattern, you want to look for the stock’s high price in the handle. By high price we are talking intraday as opposed to closing. Sometimes you get huge intraday spikes one session, and if that happens we will toss that one out as an aberration. After the stock has faded and established its high point in the handle, you add $0.10-$0.13 to that high. This will be the breakout, or pivot, point. Volume on breakouts from cup with handles and double bottoms should be approximately 1.5 times the average daily volume for the stock. If you see the stock moving through the buy point on this strong trade, it is a buy.