Turbo Trading's Head Trader Robert Knight answers the question "What is the difference between a cup and handle pattern and a wedge pattern?" Using charts from stocks traded on October 13, 2021, he provides a detailed analysis on how to recognize trading patterns. A transcript is below the video.
This is a video on, the difference between a cup and handle pattern and a wedge pattern. Somebody had asked me about if this was a wedge or a cup and handle. And there's actually, there's a lot of different patterns in this chart on $JSPR that we could look at.
First thing this morning, this did take a run. Hold it a few times. One of the big ones that people would trade off is an ABCD pattern. Here's your A, pulls back. Here's B. Here's where you accumulate in C when it runs up to here you sell half your position. And let the rest run D but it didn't really go. It never went came back, but you could also look at this as well as it developed here.
What we got was the most powerful pattern was this double cup and handle pattern. Here's the cup. Here’s the handle. Now, to make a cup and handle the cup part has to be, it has to be below the handle part and it has to be, it has, there has to be a neckline, a straight neckline like this across for a cup and handle pattern versus a wedge pattern, which obviously there's a, there's a declining line.
This is a very, powerful pattern and this is a very well-known pattern. It's probably one of the biggest patterns that traders use cup and handle probably in this case, a double cup there's your handle pops out and it did it from $16. When it broke out over this resistance neckline at $16.30, it added on, traded to $18.30, added $2 in short order. You have to wait for it to break out of this cup and handle pattern if you want to trade that pattern. So that's a very good example there of the cup and handle pattern.
Let's see, what else was it? This one as well, this isn't was a new issue here too when we didn't really catch it, but here again, you can see that the stock had a pop. This is a gain here. The cup and handle pattern really also can be, is also described as the ABCD pattern, because it's the same thing. Here's your, A, here's your B here's your C accumulation breaks out. New high of the day. So they'll have your position there and the way it goes. I prefer to trade it because there are some subtle differences between the ABCD pattern and the cup and handle.
I think the cup and handle is, is a far more powerful pattern. It did pop here's your cup, and in this case, it's a double cup, double-bottomed. So that's, that's a strong support level right there on that double bottom. Popped up to this resistance line in here, double top there pulled back, but then it made the handle pattern.
And look what happens when it breaks out over the $29.50 out over the cup and handle pattern. Boom off it goes trades to $32.50 from, from $29 and change. So the next $3 move. If you had traded this cup and handle pack.
This $RLX now is a bit different. So some people might mistake this for a couple of handle pattern. This isn't really a well-defined cup and handle pattern. What this more represents is a trading range. I mean, you could see this as the cup, and here's the handle, but because you have all these. Cups like this it's not really well-defined. So the breakout isn't as powerful because it's, it's really the trading range that it's in here between $5.25 and $5.45, $5.50 area. And though this, this does make a bit of a handle there. It's not well-defined. And so when it pops out, there's not many traders who are looking at this, or maybe there's a lot of stock outstanding, so it just can go, but it doesn't really lend itself well to the cup and handle pattern. It's more of a trading range.
This is the stock that somebody asks me, is this forming a cup and handle. And I said, not really, this is this type of pattern that looks like this. It's more of a rising, this is more of a wedge pattern. Now you do have this top line here and it failed to get through it several times, but it's not really a cup and handle.
I mean, you know, this, you are making higher lows but, it's an ascending triangle type pattern. And even though these might be viewed as cup of handles, it's not a strong pattern. This is not a strong cup and handle powder. And so I would call this more, an ascending triangle type pattern. And in here maybe earlier on you could look at maybe, okay, here's the cup and handle, but your, your neckline is too low.
You have to put the neckline where you know, the tops are, which is up here. This thing just continues to fail, to get through it. Again, here's an ascending triangle pattern here. Making higher lows, but not really cup and handle. Because with a cup and handle you need, as we saw with [$JSRP] it's a much more well-defined pattern and not quite as big. Here's your double cup, here's where it touches up, gives you the handle.
It's just clear it just more clearly defined this one. And so if people don't see. You have to remember the patterns don't mean anything in themselves. There's no, there's nothing that says a company should go up just because a certain pattern develops and it trades correspondingly to that pattern.
There's, there's nothing changed in the company that would suggest a certain pattern, more to stock trading higher. There is nothing like that. All the pattern does is if traders see a certain pattern, then they'll act on it. And the more traders that believe in that pattern or see it, the more likely there's going to be more buyers coming into the market.
In the case of a bullish pattern, more buyers coming into the market to drive it home. If the market doesn't see the pattern or, if you're the only person that thinks you see a pattern and the rest of the market doesn't, then the stocks not going to go. And that's what this is here.
This is that type of pattern. It's an ascending triangle. It's not really a cup and handle. Sophisticated traders or experienced traders are not going to trade that stock based on a cup and handle pattern. So that takes out a huge chunk of the buyers that might come into the market.
This $LAC, which was a swing trade of ours. Again, here's a pattern. Maybe you thought, okay, maybe this is a cup and handle, but we don't have a high enough - and this is too much of a drop anyways, but we don't have the right, the left side of the cup to form a cup and handle here. You've got a nice double bottom, but there's no handle.
So this is a different pattern. This is just a double bottom here and a breakout, through high of the day. Breakout in a big search pulled up, but the reason I pulled this one up is it's a good example of a wedge pattern, making higher lows here, making lower highs. And it did, it did consolidate for quite a while.
It didn't actually break out of the wedge at the apex. It just continued to go. But that's a good example of what a pattern looks like. And in this case, there just wasn't any didn't resolve into any type of pattern. So what I find with the wedge is that it's, when it comes to the apex of the wedge.
Normally you get one of two things, a pop or a drop in this case. So let's say 45% of the time it pops 45% of the time it drops. 10% of the time, it just continues to coil.
$PALT. Now, this is a pretty volatile stock. You can see it has these long wicks, it has these big spikes. You could look at this as a cup and handle. Here's your cup. Here's your handle popped out. But not so well-defined, it didn't really go, but before it made, if we look back in time, forget this, this part of the trade here. This was one, another one that, you may have thought was a cup and handle pattern.
Same thing. This could be defined as a cup and handle here and once it broke out of that, it did take a nice run to high of the day from that level. But you could also look at this as, a wedge pattern at that time.
Here's your wedge. Near the apex, it pops out and it does form a cup and handle, but again a not so well-defined pretty choppy, but you can see when it did break, the neckline here did out, pull back, held the support.
The upshot of this is the reason the cup and handle pattern is, is so much such a stronger pattern is that, more traders see it as the best defining, pattern for a bullish stock and so if it breaks out. They jump on it in a way it goes. A wedge pattern on the other hand is, you know, 45% of the time it pops 45% of the time it drops.
So they're a bit less bullish to take, take the trade at the apex of a, of a pattern like that. And it's quite often we see that on these wedge patterns where we get this fake-out, breakout, it pops, and then they just slam it. And so more widely open to manipulation. So there you go. There's a couple of ideas.