Why does the Cup & Handle Formation work so well?

Basically, two reasons: Human Nature and The Law of Supply & Demand.  As people, we tend to have habits, rituals, and programmed responses.   Money and emotion are usually linked together.      Take for example, when we are frightened, the flight reflex kicks in and we get an adrenaline rush. It’s part of being human.  We are predictable and we don’t always do the right things.

The original concept for a stock breaking out through a line of resistance originated back to Nicolas Darvas with his “box” theory back in the late 1950’s.  After making most of the same mistakes we all make when we first enter the world of stock trading, he discovered a pattern he referred to as creating “boxes” prior to the start of upward movement by a stock.  His book “How I Made $2,000,000 in the Stock Market” is well worth your time.  Back in the 60’s that was serious money!

The "Box System" developed by Darvas used Support for the Top of the Box and Resitance for the Bottom of the Box. The Box was drawn around an area that we call "consolidation" or when a stock takes time out from an uptrend to take a breather. This is the same as the Cup with Handle formation. In the Cup with Handle the Pivot Point Price becomes the Resistance Price same as the Top of the Box in Darvas' system.

Here’s how it works. 

When the price of a stock has been in a steady uptrend with a 25% to 30% gain Investors will began to take profits. They begin selling, and like cattle, more and more people follow suit and also sell. The price of the stock drops quickly forming the "Left side" of the cup. The "smart money" people see an opportunity. They start buying this now "UNDER VALUED STOCK" creating the "bottom portion" of the cup. This move is subtle by nature, no large block buying occurs at this time.

These Savvy Investors keep adding to their portfolios by discretely purchasing more and more of the stock over time. The Supply and Demand Rule kicks in and the price of the stock starts rising forming the "right side" of the cup. When the price reaches it's highest closing point before it starts to fall back, establishes what is called the "Pivot Point".

Typically this occurs when those traders that bought in close to the Left side High see an opportunity to get most of their money back start to sell. Seeing that the stock is rising (forming the right side) they start to unload their stock, below their original purchase price. They have been in a panic since they bought in because the price had immediately started down, locking them into a losing position. Now they see a chance to minimize their original losses. This selling (increase of supply) causes the rise in price of the stock to cease and fall back slightly, as more people want to sell than buy. The "Handle" initially will usually fall sharply for a few days and then go into a slight downward trend and then taper off to a horizontal line as the weak investors are depleted. The volume too will decrease as the weak timid investors are depleted. Then as the demand increases there are no sellers left and the stock can now go only one way, UP.

Once the price rises out of the handle and closes above the Pivot Point Price with the Volume being at least 150% of the 50-Day Average, we have a “Breakout”.  The Pivot Point gives us a definitive Buy point. This is the time to bet a lot of chips on “lucky 13” on the roulette table, knowing that 13 is going to be the next number up, just before it hits!  Lots of people are following this activity and everyone wants a part of the action.    An upward movement is established.  Institutions start buying huge blocks of stock and the sky is the limit, at least for the next period of time.

Cup Watch is the “World’s Authority” in identifying these formations, the Del Report, sending out real time alerts, and the supplier of “CupTrade Strategies”.   Automatic software which gets you in close to the Breakout Point and sells you out at close to the “high point” of the stock before it goes thru another correction.

This cycle repeats again and again.  The exact numbers vary, the time for the cup w/ handle can take a few weeks up to six months or more to develop.  

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