Cup with handle

Quick definition

A cup-with-handle base is a price consolidation that a stock goes into after a prior uptrend. It derives its name from its shape.

Key details

• If you outline this type of base, it will look like a teacup, with a handle at the end of it.
• A cup-with-handle base gives a winning stock a chance to take a break and refuel after an impressive uptrend. 
• The left side of a cup-with-handle base will begin to form, as the stock falls in a manner that resembles a rounded side of a teacup. That left side forms due to big-money investors taking profits.

What Is a Cup-With-Handle Base?

A cup-with-handle base is a price consolidation that a stock goes into after a prior uptrend. It derives its name from its shape: If you draw an outline around this type of base, it will look like a teacup, with a handle at the end of it.

Why Is a Cup-With-Handle Base Important for Investors?

Like all bases, a cup-with-handle base gives a winning stock a chance to take a break and refuel after an impressive uptrend. This is necessary for the stock to shake out the non-believers who want to take their profits and run, clearing the decks for the next round of bullish institutional investors to buy on high volume and propel the stock higher.

Once that new round of investors arrives, a breakout tends to follow (more on breakouts in a future lesson). Once that breakout happens, it’s off to the races again.

What Are the Stages of a Cup-With-Handle Base?

Following a prior uptrend, the left side of a cup-with-handle base will begin to form, as the stock falls in a manner that resembles a rounded side of a teacup. That left side forms due to big-money investors taking profits.

The selling will eventually stop, causing the cup-with-handle base to find its bottom. As it does, the base will go from a downslope to an upslope, forming that rounded bottom that resembles that of a teacup.

The right side of the base forms in a similar rounded, teacup fashion, as buyers step in to push the stock higher.

Finally, a handle forms at the end of the base. In that handle, the stock will tick only slightly lower, usually in light volume. That’s the final step needed to prime the stock for a big breakout.

What Are the Prerequisites of a Cup-With-Handle Base?

The shape of the base in itself isn’t enough to establish its validity. A cup-with-handle base requires a 30% prior uptrend, to indicate that the stock is riding a longer-term uptrend, even as it’s taking time to consolidate. 

Also, a cup-with-handle base must last at least seven weeks from the time it starts forming its left side after hitting a previous high, all the way to the breakout point at which the stock surges past a point of prior resistance.

The handle then needs at least five days to form, though it can sometimes last for several weeks. Also, the handle shouldn’t dip lower than the bottom of the cup shape as a whole. Remember: A proper cup-with-handle should look like the outline of a teacup.