A price pattern that looks like a cup with a handle is one of the most important models for picking rising stocks. The cup itself can last from 7 weeks to as long as 65 weeks; however, most cups last anywhere between 3 to 6 months. The price correction from the absolute top of the cup to the bottom of the cup is usually 12% to 15%, and may be as much as 33%. Prior to the correction there should be a clear uptrend of at least 30% along with a substantial increase in volume at some point during the uptrend.

The bottom of the cup should resemble a “U” as opposed to a sharp “V”. The “U” shape is important because it gives the stock a natural correction period during which the weak holders get out of their positions. Also other speculators do not pay much attention to the flat pattern of the bottom of the “U”. As a result firm grounds are formed by the strong holders who are not likely to sell in the next advance.

 It is normal for growth stocks to create cup patterns during general market declines and correct 1.5 to 2.5 times the market averages. The best cups are those that deteriorate the least during an intermediate market decline. Stock downtrends exceeding 2.5 times the market averages should generally be regarded with suspicion.

As an example of a stock displaying the cup and handle pattern consider the diagram below: