Cup and Handle Chart Patterns Forming Right Now (CTAS, CCO)

A cup and handle is a relatively common chart pattern which can be used in various ways. It's often used to indicate a reversal from a downtrend to an uptrend. The stocks below have smaller cup and handle patterns, which are part of the larger uptrend. In the context of the broader trend the cup and handle indicates the uptrend is likely to continue. The formation is created by a high, a pullback which flattens out near the bottom and the price rising again. This creates a cup or saucer-like appearance. When the price reaches the former high (or close to it) it flattens out again, moving within a small price channel. This is the "handle." Since the price is moving higher within an overall uptrend it's a bullish pattern. When the price breaks above the price channel, take a long trade.

Xilinx Inc. (XLNX) bottomed at $36.24 in October, which marked the end of a downtrend as the price rallied to a December high of $47.30. After that it pulled back, and since then has been making its way back to the December high. A strong rally in May reached $47.45 at which point the price began to move within a small channel--our potential handle. A trade occurs on a handle break to the upside--currently that occurs if the price moves above $47. Handles can last for weeks though, so trading this pattern is trickier than it first appears. Sometimes it takes several attempts/breakouts before the price moves legitimately higher (it could also drop after giving a signal). An estimated target is height the of cup added to the breakout point. With an approximate height of $8 (rounded down) the long-term target is $55. Controlling risk on this pattern is discussed later.

Buckeye Partners, L.P. (BPL) has a similar pattern to Xilinx--after selling off in October the price rebounded to $85.14 in November, pulled back again and is now fighting its way back to the November high. This chart shows that handles can be more complex than a single tight channel. This handle is currently more pennant shaped, with a breakout and entry price above $81. Price target is approximately $14 plus $81 = $95. 

Cintas Corporation (CTAS) reached a high of $88.23 in March, pulled back, and strength in May is once again pushing the stock toward that high. Even though the price hasn't reached that high yet, the appearance of a handle makes this a (lopsided) cup and handle pattern. If price breaks above the top of the handle (currently $86.50) the estimated target is $93. Of some concern is the massive bearish candle which occurred on the day of the March high. That indicated a strong shift in sentiment in this stock. If the price breaks the handle it's still a valid buy signal, but it'll be interesting to see if the price can clear that resistance area near $88.

Lennox International, Inc. (LII) put in a new high at $115.21 in May, just edging past the $114.08 April high. Given the long-term uptrend if the price breaks above $115.21 the price is likely heading higher. Target is $125.

Just because the cup and handle appears doesn't mean the price is going higher. Wait for the price to break above the handle. That at least shows short-term momentum is up (in alignment with longer-term momentum). After entry the price can still drop though, so controlling risk is important. The handle provides the entry and also the stop loss location. When a trade signal occurs place a stop loss just below the handle low. Since handles are smaller than the cup which the profit target is based on, the risk/reward ratio on the pattern is favorable. In the case of Lennox the profit potential is $9.78 per share ($125-$115.22). If the price were to breakout now, the stop loss would be placed at about $112.85, resulting in a risk of $2.37 per share ($115.22 - $112.85). As the handle progresses and creates new lows the stop level will need to be adjusted accordingly. 

The Bottom Line

The cup and handle chart pattern can signal a reversal or a continuation of the trend. Wait for the price to break above the handle before taking a trade, and place a stop loss below the handle. An estimated profit target is the height of the cup portion added to the breakout price. The risk/reward on the pattern is favorable assuming the handle is smaller than the size of the cup (must be, otherwise it isn't a cup and handle pattern). Handles can last for weeks and become quite complex, which means some losing trades may occur before a real breakout happens. Decide beforehand if you are willing to enter the same trade more than once if stopped out.