What it is
The cup and handle, described by William O'Neil, is a continuation base. After a prior advance, price forms a rounded U-shaped correction, the cup, then a short shallow pullback near the old highs, the handle, and finally breaks out through the handle's high.
How it works
The canonical version specifies a preceding uptrend of at least thirty percent, a base lasting from about seven weeks to a year, a cup depth usually between twelve and thirty-five percent, a rounded rather than a sharp V bottom, and a handle that drifts slightly downward in the upper half of the base while volume dries up. The buy point is the handle's high, and the measured objective adds the cup depth to that pivot.
How traders use it
What the pattern really encodes is supply exhaustion. The cup is the process of working through sellers left over from the old high; the handle is a final low-volume shakeout of weak holders immediately before the breakout. The volume signature — contraction through the handle and a marked expansion on the breakout day — is doing more of the work than the outline itself.
Where it breaks down
The pattern was formulated on US growth equities with strong earnings behind them, and applied indiscriminately to any instrument on any timeframe it loses most of its meaning. Deep, V-shaped or wide and loose bases have materially worse follow-through, and in a weak overall market the majority of textbook breakouts fail regardless of shape. It is also easy to redraw a handle after the fact until the pattern fits, which makes casual pattern-spotting a poor guide to base rates.
Educational reference. This entry describes how a concept is defined and used. It is not investment advice, not a recommendation, and not a signal. Any rule you build from it should be tested with realistic costs before it is traded, and no historical result guarantees a future one.