Why Trade the Cup with Handle

Pattern?
By Dale Glaspie

any traders/investors swear by the Cup with Handle. On the other side there are just
as many that dont want any part of this beast. So what is the truth! Those that trade
it with great success have spent the time necessary to understand how and when it
works and when it doesnt. Others have tried it when the market wasnt right and have met
defeat.
To fully understand how to use the pattern correctly you must first experience the other
side. The old adage for every action there is an opposite reaction applies in this case. Not
until after developing the Inverted Cup with Handle during the bear market from March 2000
to September 2002 and beginning an in-depth study on how these two patterns interacted
was I able to glean a clear picture on how to trade them.
The Cup with Handle is a bullish pattern and is formed when a stock, while in an uptrend,
stops to take a rest. If the market remains bullish after the pattern is formed it will usually
breakout and move up for good gains providing other factors such as strong fundamentals,
earnings and relative strength, exist. If the market turns bearish during the consolidation
period the pattern will meet almost certain death even with the best fundamentals. This traps
those that try to force it to work and they end up in a losing trade.
The Inverted Cup with Handle is a bearish pattern and is formed when a stock, in a

Chart 1 - (HPQ)
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downtrend, takes some time to consolidate. After the pattern is completed if the market is still
bearish, the stock will breakdown giving the trader that enters a short position a rapid gain.
If on the other hand the market turns bullish while the pattern is being completed it will meet
almost certain failure, which means instead of going down the price will take off to the upside.
Both of these patterns are formed when a stock is trending either up or down. It must be
in a trend for a while before either pattern can form. What I am about to say is going to shed
a light on your trading that you never before knew existed. Why can I say that? Because I
am the one that discovered it and no one else has ever mentioned it anywhere. The reason
is because they didnt know about the Inverted Cup with Handle pattern.
Here it is! Why wait for these patterns to form before we make a trade. Lets get in when
the trend begins to form. That first leg up or down will be the most powerful. It will also
offer you a great opportunity with low risk. Many strong downtrends start from a failed Cup
with Handle pattern. Likewise a good number of uptrends start from failed Inverted Cup with
Handle patterns. I call these directional changes Transition Phases. When the Cup with
Handle fails as the market turns bearish we are entering the Down Transition Phase. Likewise
when the Inverted Cup with Handle fails as the market turns bullish we will be entering the Up
Transition Phase. There are three identifiable trades associated with each phase.
In the past we have been told a market cycle occurs when we go from a bull market to a
bear market back to a bull market. Using what I call the Four Phases of the Cup with Handle
Cycle we go from a bull market phase to the down transition phase to the bear market phase
to the up transition phase. Previous wisdom has stated the stocks will follow the market about
70 percent of the time. By using the Cup with Handle Cycle philosophy we can increase that
to better than 90 percent of the time.
In the following paragraphs I will point out the different strategies I have identified to trade

Chart 2 - SBS
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each phase of the Cup with Handle Cycle.

Bull Market Phase The Cup with Handle pattern works great in a well established bull
market. The first trade will always be from a Cup with Handle setup. After breaking out above
the Pivot Point Trendline and moving up, the stock may make a correction that requires us
to exit. If the uptrend starts up again we use my Up Trend Strategy to enter a second trade
and any other trade we make in this uptrend.
Note: The Pivot Point Trendline is a horizontal line drawn to the right of the Pivot Point
Price (PPT) which is the Close on the bar that made up the Right Side of the Cup. This line
will become a powerful Support and Resistance Line.
Down Transition Phase There are three trades used in this phase depending on where
the pattern development is when the market turns bearish. If the Market has already turned
bearish when the pattern is completed we use the CHandle Strategy. This strategy enters
a short position, as the stock will be expected to immediately enter a down trend. In other
words the pattern will fail in the handle of the cup. If the pattern is in the handle of the cup
when it fails it will trade up to the Pivot Point Trendline (PPT) and appear to repel or bounce off
the PPT. Here we would use the CBounceOff Strategy to catch a ride on the down trend. If the
stock price has already brokeout above the PPT and the market turns bearish and reverses we
want to get in the trade when it closes back below the PPT. This strategy we call the Reversed
Cup with Handle Trade. If either of these trades makes an exit before the down trend ends,
additional trades can be made using the Down Trend Strategy.
Bear Market Phase The Inverted Cup with Handle pattern is used in an established

Chart 3 - GGC
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bear market. After breaking down below the PPT the strategy will enter a short position. If
a correction causes the strategy to exit before the down trend ends, additional trades can be
made using the Down Trend Strategy.
Up Transition Phase During a prolonged bear market there will be a large number of
Inverted Cup with Handle formations ready to fail when the market turns around. This phase
offers some of the best trades you will ever have the opportunity to engage in. Markets
usually turn around in one day enabling the astute trader to get in at the beginning of an Up
Trend. If the market has already turned bullish before the Inverted Cup with Handle pattern
is completed we would use the IHandle Strategy to enter a long position as soon as the stock
shows up in our Daily CupWatch Report*. If the stock is in the handle and moving back
toward the PPT when the market turns we would use the IBounceOff Strategy as it will likely
repel or Bounce Off the PPT to start the uptrend. If the stock has already broke down and
closed below the PPT when the market turns up we would use the Reversed Inverted Cup with
Handle Strategy to catch the uptrend when the stock broke out above the PPT on its way up.
This is my favorite strategy. It enables us to get in at the lowest possible price with little risk.
Since 2000 we have had four major bear markets come to an end and after each one there
were a good number of Reversed Inverted Cup with Handle trades. During the fourth quarter
of 2010 I made a 241% profit trading options using this pattern. Many of those trades came
from Visa, Mastercard and American Express.
There is not enough space available in this article to go into the detail needed to fully
exploit the Cup with Handle Family. Since 2000 I have been doing research and development
on a set of strategies that automatically trade each of the trades explained above. There
are 10 different strategies that make up the CupTrade Strategies. The following charts will

Chart 4 - CRL
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show you how some of these have worked in the past. It performs in this manner consistently
with low risk.
Chart 1 for Hewlett Packard (HPQ) shows how the stock formed a Cup with Handle pattern
during the end of a Bear Market and the beginning of a Bull Market. In the chart I have
explained how the CupTradeLE Strategy entered a long position when the stock broke out
above the Pivot Point Trendline on stronger than average volume. We would only make
this trade if the company has strong fundamentals and has proven it can make a profit over
several quarters.
When the price forms an Inverted Cup with Handle during a Bear Market it usually breaks
down rapidly and rewards the savvy trader with large gains in a short period of time. Such
was the case with Chart 2 SBS.
Most bull markets will last for several months or even years. During this time there will be
a large number of Cup with Handle patterns formed. When the markets turn bearish most if
not all of these will never breakout or will fail shortly after breaking out. Chart 3 shows how
GGC failed immediately after it was reported in the Daily Cupwatch Report. We were able
to capture good gains by using the CHandleSE Strategy. Notice how the DnTrendTradeSE
Strategy entered the last three trades after the initial trade that was based on the failed Cup

with Handle made an exit.

When the Cup with Handle fails after it has already broken out it will more often than
not cross back below the Pivot Point Trendline where we get in a short position by using the
ReversedCWHTradeSE. Chart 4 for Charles River Labs (CRL) provides a good example of this
powerful trade.
My favorite strategy of all is the Reversed Inverted Cup with Handle Trade. It is formed when
the market turns bullish after a strong bear market. Stocks that have broken down below the

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Chart 5 - SHOO

PPT will turn around sharply and cross back above the PPT for large gains. Remember all Cup
with Handle patterns are formed after the stock has been in an UpTrend for a period of time.
The traditional cup with handle trader will miss this first uptrend completely as they await the
Cup with Handle setup. Chart 5 for Madden (SHOO) shows how the ReversedInvCWHTradeLE
Strategy caught this powerful move just as the trend started up. Notice how the Cup with
Handle formed at the top of this first runup. The rest of the world missed this 90% gain in
two months.
When the market turned around in one day on March 9, 2009 all three major indexes,
Dow Jones, Nasdaq 2000 and the S & P 500 along with several good stocks including Apple
and Madden (see previous chart), had formed Inverted Cup with Handle patterns that would
fail and cross back above the PPT to make tremendous gains. Chart 6 for the NASDAQ 2000
Composite ($COMPX) offers a good example of how the ReversedInvCWHTradeLE Strategy will
make unbelievable trades. This strategy will enter the market at the lowest possible point,
just as the uptrend begins. This approach may be new to you. If you wish to be included in
one of our upcoming seminars to learn more about the opportunities of trading the Cup with
Handle Family of Trades, email me at daleg@cupwatch.com or call me at 800-453-9080. Visit
my website at www.cupwatch.com.
*The Daily CupWatch Report is available by subscription and identifies stocks that meet the
criteria used by our strategies.

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Chart 6 - SA