Chart Patterns: The Cup and Handle Pattern

I don't believe in chartism. Let's start with that. Chartism is the hypothesis that stock markets, like an etch-a-sketch, draw pictures, and that some of these pictures are bullish, others bearish.

But, just for fun, let's discuss a Chartist pattern today. The most renowned of them is the cup-and-handle.

You see an example above. At the right edge of that chart, a true Chartist would be screaming to himself, "BUY!!!"

Here are a couple of points: This formation only matters if it happens AFTER a longer bullish period. And it is a "continuation" pattern. That is: the cup-and-handle illustrate that the bull market in XYZ stock has taken a necessary "breather" and is ready to resume its upward course.

You see that the "cup" formation is supposed to be a U-shape, not a V. Also, chartists are happiest when the volume numbers at the bottom of the cup are low. Both of those facts signal that there was no rush to dump the stock once it started down. The supposed cup shape also looks like a gentle hammock.

The "handle" is a bit trickier to understand intuitively. After all, the handle part of the formation DOES look like a bit of a "V." Though it is a V that is only half the depth of the preceding U.

Once the stock starts the upswing in that handle-or-V, Katie bar the door. Buy XYZ stock.

Or ... don't. Tomorrow I might tell you how to find neat patterns in chicken entrails and predict things from them.

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