FCX: Cup & Handle & "Chart School"

This is from Stockchart.com's "Chart School." I made a few comments in BOLDFACE.


1. Trend: To qualify as a continuation pattern, a prior trend should exist. Ideally, the trend should be a few months old and not too mature. The more mature the trend, the less chance that the pattern marks a continuation or the less upside potential.

NOTE: THE UPTREND IN FCX WAS ONLY DAYS OLD, BUT DESPITE THAT AND THE INTERVENING DESCENDING TRIANGLE (PATTERN IN WHITE), THE CUP & HANDLE TARGET OF 51.35 GOT MADE AT FRIDAY'S OPEN OF 51.38 (ORANGE ARROW).

2, Cup: The cup should be "U" shaped and resemble a bowl or rounding bottom. A "V" shaped bottom would be considered too sharp of a reversal to qualify. The softer "U" shape ensures that the cup is a consolidation pattern with valid support at the bottom of the "U". The perfect pattern would have equal highs on both sides of the cup, but this is not always the case.

NOTE: ARGUEABLY, THE BOTTOM OF THIS CUP WAS A BIT V-SHAPED, BUT IT WASN'T STRAIGHT DOWN, THEN STRAIGHT UP, LIKE A "V." IT'S UP TO THE INDIVIDUAL ANALYST HOW STRICT THEY WANT TO BE ABOUT THESE THINGS. I LIKE TO BE AS FLEXIBLE AS POSSIBLE, WITHOUT IMAGINING SOMETHING THAT REALLY DOESN'T EXIST AT ALL.

3. Cup Depth: Ideally, the depth of the cup should retrace 1/3 or less of the previous advance. However, with volatile markets and over-reactions, the retracement could range from 1/3 to 1/2. In extreme situations, the maximum retracement could be 2/3, which is conforms with Dow Theory.

4. Handle: After the high forms on the right side of the cup, there is a pullback that forms the handle. Sometimes this handle resembles a flag or pennant that slopes downward, other times just a short pullback. The handle represents the final consolidation/pullback before the big breakout and can retrace up to 1/3 of the cup's advance, but usually not more. The smaller the retracement is, the more bullish the formation and significant the breakout. Sometimes it is prudent to wait for a break above the resistance line established by the highs of the cup.

NOTE: THIS HANDLE WAS A SYMMETRICAL TRIANGLE (PATTERN IN RED).

5. Duration: The cup can extend from 1 to 6 months, sometimes longer on weekly charts. The handle can be from 1 week to many weeks and ideally completes within 1-4 weeks.

NOTE: MY FEELING IS THAT THE HANDLE SHOULDN'T DRAG ON AND ON AND ON. IT SHOULD FORM OVER A PERIOD OF TIME THAT IS "REASONABLY" SHORTER THAN THE FORMATION OF THE CUP, LIKE THE HANDLE IS THIS CHART. AGAIN, THAT'S UP TO INDIVIDUAL INTERPRETATION.

6. Volume: There should be a substantial increase in volume on the breakout above the handle's resistance.

7. Target: The projected advance after breakout can be estimated by measuring the distance from the right peak of the cup to the bottom of the cup.
As with most chart patterns, it is more important to capture the essence of the pattern than the particulars. The cup is a bowl-shaped consolidation and the handle is a short pullback followed by a breakout with expanding volume.

As with most chart patterns, it is more important to capture the essence of the pattern than the particulars. The cup is a bowl-shaped consolidation and the handle is a short pullback followed by a breakout with expanding volume.

NOTE: I WHOLE-HEARTEDLY AGREE WITH THE BOLDFACED COMMENT. THURSDAY, WE HAD A H&S TOP, THE RIGHT SHOULDER OF WHICH WAS HIGHER THAN THE LEFT SHOULDER. THAT'S A "NO-NO" ACCORDING TO THE ORTHODOX RULES OF A H&S TOP, BUT THE TARGET GOT MADE, REGARDLESS.

"IF IT WALKS LIKE A DUCK...QUACKS LIKE A DUCK..."

Hope this link to chart school's example of a Cup & Handle works:

http://stockcharts.com/school/doku.php?id=chart_school:chart_analysis:chart_patterns:cup_with_handle_cont