Don’t know much about history, don’t know much biology, don’t know much about these crazy technical indicators people talk about so I decided to look some of them up. Just as I did (albeit briefly) before with an investing strategy (there are more on the way I hope), I’ll do the same with some popular technical indicators. This time, I take a look at the always popular Cup & Handle technical indicator – which is a bullish indicator.
Image from Investopedia
Why do its proponents claim it works? Well, what you have is a case of an investment that has turned a little sour and is on its way back up – but there’s a catch. The handle occurs when people who bought in at the start of the cup decide they want out, so the price will drift sideways or even lower and thus creating that little handle. Once that selling pressure is gone, the stock will take off. The only hitch in that idea is that you have no idea how long that handle is going to drift, it can be as short as a couple days or as long as a couple months.
So, the next step is understanding the various dimensions of the cup itself. If the cup itself is wider and has a long U, that’s a solid cup signal. If it’s more like a V or if it’s too deep (again, subjective), yuck stay away. Now, as for the volume of the security, the volume should be smaller as you get lower and lower into the cup and be lower than average at the bottom of the cup. As the price increases again, finishing the cup, the volume should increase.
This indicator is a little tough because it is so subjective, how deep is too deep, how much volume is too much, and because you have to see it after the fact. You have to identify the cup after it’s almost been formed (otherwise it could just be a decline) and then be able to jump in at the right moment. Unfortunately I don’t know of any historical data where folks have looked at cups and handles to see how things ended up but this is definitely one of those classic technical indicators most investors have heard before.