2007issue C091-3
Cup-and-handle construction versus an ascending triangle
A cup-and-handle can be misread as an ascending triangle when a line is drawn from the cup low to the handle low. Construction holds when the cup is generally rounded, the handle is smaller in time and price, and a clearance of the highest of the three defining highs is treated as a hypothesis only with thinner participation on the handle pullback and heavier participation on the break.
- A cup-and-handle can be misread as an ascending triangle when a line is drawn from the cup low to the handle low. A generally rounded cup is what separates the two constructions.
- Jagged movement inside the cup does not disqualify the structure if length and roundness still confirm the formation, but the handle must be smaller than the cup in both time and price.
- Volume-confirmation requires lower participation on the handle pullback and higher participation as price returns toward the old high and then breaks it.
- A long-side breakout is constructed with a buy-stop above the breakout-level, the highest of the three highs that mark the cup left rim, the cup right rim, and the handle.
When the cup is read as a triangle
A cup-and-handle can be misread as an ascending triangle when a line is drawn from the cup low to the handle low. The ascending-triangle is a flat-high, rising-low silhouette that a cup-and-handle can mimic if a line is drawn only from the cup low to the handle low. A generally rounded cup is what separates the two constructions.
A cup-and-handle is a generally rounded retracement back to a prior high, followed by a smaller handle that makes a third test of that high.
The cup after a new high
The cup starts after a new high and a deeper-than-usual pullback. On weekly or monthly scales that pullback can occur while the prior trend remains intact.
Jagged movement inside the cup does not disqualify the structure if the cup’s length and roundness still confirm the formation.
Handle-scale
The handle must be smaller than the cup in both time and price. The handle must be shorter in duration and narrower in price than the cup. A handle that is lower and larger in width and length is not a cup-and-handle. A lower, wider handle fails the construction test.
One construction window in the evidence is a cup of two to five months and a handle of one to two months, with the cup’s price range at least twice the handle’s range.
Volume-confirmation and the breakout-level
Volume-confirmation requires lower participation on the handle pullback and higher participation as price returns toward the old high and then breaks it. Thinner participation on the handle pullback and heavier participation as price retests and then clears the prior high completes that check.
A long-side breakout is constructed with a buy-stop above the highest of the three highs that form the cup and handle, so entry occurs only if that level is cleared. The breakout-level is the highest of the three highs that mark the cup left rim, the cup right rim, and the handle.
A downside construction
The same geometry can be inverted as a downside cup-and-handle for a short-side construction.