Cup and handle (and rounding bottoms)

What it is

A cup and handle is a rounded, U-shaped base (the cup) after an uptrend, followed by a small, shallow pullback near the right-hand rim (the handle) and a breakout above the rim. William O'Neil made it famous in How to Make Money in Stocks. A rounding bottom (or saucer) is the same rounded base without the handle.

In Bulkowski's statistics, rounding bottoms rank among the best patterns for upward breakouts. Those numbers come from daily US stock charts, so treat them as a guide on other markets.

How to spot it

• A gradual U, not a sharp V.
• The handle stays in the top part of the cup and drifts down on lighter activity.

How to use it

• Buy the break above the rim, or the retest of it, with the stop under the handle.
• A common target is the cup's depth added to the breakout point.

Common mistakes

• Calling a sharp V a cup.
• Buying inside the handle before the breakout.

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