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One of the comments from yesterday’s After Hours article was a question about pattern identification and validity. We felt that our readers correctly perceived this pattern and warranted an explanation of how we would incorporate this pattern into gold’s current price action. 
Glenn Akers of Seattle, Washington, asked about a pattern known as the “cup and handle” and whether the recent price action in gold futures led to the formation of this pattern. First and foremost, I agree with Glenn’s identification that the gold rounded bottom followed by a period of strengthening with a downward bias can be correctly labeled as a “cup and handle” pattern.
This pattern was created by William O’Neill, who founded a brokerage firm in 1984 before launching the business newspaper Investor’s Business Daily. success. It was in this publication that he first revealed his patterns.
William O’Neill’s “Cup with Handle” pattern is a bullish continuation pattern. This pattern marks a period of consolidation that portends a breakout to the upside. The pattern paper consists of two parts: the cup and the handle. The cup resembles a western technical pattern called “round bottom” because it resembles a bowl.
This is followed by a “handle”. This happens after the rounded bottom is completed and a high is formed on the right side. This begins to consolidate with a downward bias creating a pattern resembling a flag or pennant formation.
How to use the cup and handle pattern
Once the handle is formed, wait for a downward-biased pennant formation to start rising at some point. It gives a valid buy signal when the rising price crosses the top of the cup. Typically, an upward rally is considered to occur when the price action exceeds the top of the cup equal to the distance between the bottom and top of the cup.
The chart above is a daily gold chart depicting a “cup and handle”. I hope this answers the question posed by one of our readers.
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Disclaimer: The views expressed in this article are those of the author and may not reflect the views of the author Kikko Metals Co., Ltd. The author has made every effort to ensure the accuracy of the information provided. However, neither Kitco Metals Inc. nor the authors can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation of an exchange of commodities, securities or other financial instruments. Kitco Metals Inc. and the authors of this article accept no liability for loss and/or damage resulting from the use of this publication.
