To The Moon

Eat a cup of tea at FOMC.

A cup and handle pattern is formed when there is a price rise followed by a fall. The price rallies back to the point where the fall started, which creates a “U” or cup shape. The price then forms the handle, which is a small trading range that should be less than one third of the size of the cup. It can be horizontal or angled down, or it may also take the form of a triangle or wedge pattern.

When the pattern is complete, a long trade could be taken when the price breaks above the handle. However, some traders make the mistake of assuming that once a U-shape forms, the price will drop to form a handle. It may not, so you should ideally avoid trading the pattern until it has fully formed, in order to confirm the trend. You could wait for the price to break above the handle to signal that the uptrend is continuing. This is called a bullish continuation pattern.

How To Trade It?

The cup and handle pattern can be seen almost as a trading strategy, as the pattern provides an entry on the handle breakout, a stop-loss below the handle and a profit target based on double the handle size or the height of the cup. The pattern can be traded on all markets and timeframes. No technical pattern works all the time, which is why a stop-loss is used to control the risk on trades that are less efficient.

Entry points, stop loss and price target

The entry point for a cup and handle pattern is to buy when the price moves above the handle formation. This is made simpler by using a drawing tool and waiting for the price to move up and out of the drawn handle pattern. A stop-loss can be placed below the low price point in the handle.

An estimated target is the height of the cup added to the handle breakout point; however, this may not always be met, as it requires a large price movement. A more conservative target is taking the height of the handle, multiplying it by two and adding it to the breakout price of the handle. This method provides a trade with a 2:1 risk/reward ratio . The potential profit is twice the risk because the risk is the size of the handle.

Handling C&H At FOMC?

Shares and stock indices with lots of upward momentum prior to the cup and handle forming tend to produce the most favourable cup and handle patterns for trading. If a stock or index is strongly rallying prior to the cup and handle forming, there is a high chance that many buyers are already interested in the stock and will step in to fuel the price higher once the cup and handle forms. In this case, traders may focus on stocks or indexes that saw strong percentage advances heading into the cup and handle pattern.

Need to break above the triple top and hold 565

SPY has been extending its run for the last five days. The market is expecting a rate cut at the upcoming FOMC meeting. The question now is whether a quarter point or half a point cut. A 0.5% rate cut will send the rocket to Mars whereas a 0.25% cut could be less favourable or even backfire.

⚠️ Trading tips: Will be eyeing for dip buy opportunity from profit taking leading to FOMC. Do refer to yesterday’s posting on the strategy to buy the dip for the best risk/reward ratio. Wait for the Fed chair’s interview post meeting to trade the reactions by engaging the breakout strategy with a stop loss highlighted in this article. Have a profitable trading week ahead!

Trend is your friend

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