One of the most reliable of all chart pattern formations in financial trading is the venerable "Cup & Handle". This classic signal is clearly seen as the side-view profile of a teacup with handle off to it's right.

Such a pattern is commonly formed when a market rallies to recent highs and then corrects 33 - 50%. Such corrections are normal for markets that have advanced considerably over the recent past.

Volume should decrease as the correction ends, signaling a lack of further downside pressure. Prices then advance near or back to the area of the previous high. This completes the profile of a cup from lip to lip as viewed from its side.

Around this time we look for a second pullback in price of 5 - 30% the size of this cup. Greater declines than that signal the pattern has likely been nullified. Once the mini-correction stalls, prices continue to rise once again towards the previous mark.

Former price highs and recent price highs near each other form the cup. A slight decline and advance to both previous highs forms a handle as we draw a trend line across the tops. Such patterns become second nature to spot with a bit of practice.

This action occurs due to remaining buyers who rode the market from it's previous high to the bottom now looking to exit near breakeven. We assume the formation of the actual handle is proof that all weak hands who wanted out have sold and new buying will lead to further highs.

Formations that occur on daily charts over a few weeks time tend to have deeper cups and sharper handles. This due to compression of price action in a relatively brief period. Similar formations on weekly charts may appear more like a saucer than an actual cup. Such patterns create shallow bowls and longer handles but the results are the same: higher prices if the pattern completes.

Volume plays a big role for interpreting cup & handle patterns. We like to see volume increase as prices rise and decrease on any pull back. This proves buying strength is now the bias.

For completion of the pattern, price action needs to break out above the handle on higher-than-normal volume. Such bullish behavior proves selling is out of the way and new price highs are probable.

As stated, these formations verified by strong volume on price advances can be high-odds trade setups. Let's review some recent ones depicted below;

(Daily Chart, JPM)

JP Morgan made a classic cup & handle from early June through the beginning of August. Those who didn't buy near lows in early July may have thought the move was over. Far from it.

Our handle was resistance broken on strong volume and a bullish gap-up move in mid-August. Alert traders who entered near $140 would have gained $30+ less than one month later at the time of this writing.

(Daily Chart, IBM)

Big Blue had its share of struggles this year and part of that action created a deep cup & handle pattern. From the high upper- lip in early June near $122 to the extreme low in early July near $101, we have a cup's bowl that spans $21 in size.

The subsequent handle extends from $110 to $117 or $7 in length. That would be a 33% retracement of its total cup length. From there prices rallied and broke through descending resistance to a 10+% advance in less than three weeks on this large-cap issue.

(Daily Chart, F)

Here we see Ford trying to form a nice cup with what seems to be a solid bottom of support. The handle clearly evolved and even pierced resistance intraday on higher than normal volume (not shown). Still price action failed near there and broke down considerably soon after.

A classic case of one pattern, signal or news by itself failing to perform as expected. Perhaps a study of several technical indicators might have filtered out this failed study.

(Daily Chart, JNJ)

Johnson & Johnson went one for two here. Solid gains above the first formation and dismal failure follows the second.

A great example of the magnitude money-management plays in long- term trading success. If you entered the first play near breakout at $92 and sold near the high at $102 you made ten points. Enter the second one on its spike at $99 and get stopped out near $95.

Make $10, lose $4, keep $6 in the end. Do that consistently every two trades and massive wealth would soon be yours!

(Daily Chart, GM)

Now we have GM. Formed a bullish double-bottom not long ago and appears to be making a handle. Recent news about Carl Icahn in the mix and this might be a formation to keep an eye on!

Where would you look to buy as confirmation? Will you check daily volume to verify buying is buoyed by strength? Should we apply other technical tools to further screen this play? You decide.

Through fundamental investor sentiment & logic, cup & handle patterns are chart formations that offer strong indication of price advances when noted. In combination with other market studies, learning to spot and trade these patterns is one big step to success.