The SPDR Homebuilders ETF (XHB) is setting up for a great trade.

XHB is tracing out one of my favorite breakout patterns – the cup and handle.

This isn’t as common a chart pattern as say a bull flag, pennant, or wedge. But it’s an extremely powerful one with a high success rate.

The cup and handle is a trend continuation pattern. Once the pattern breaks out, prices should travel strongly in the direction of the larger trend.

In the case of XHB, the market has been steadily trending higher since 2009. But like the rest of the market, XHB pulled back for much of 2022, reaching lows of around $51.

This pullback formed the “cup” part of the pattern.

By August 2023, XHB had nearly reclaimed its 2021 highs of around $86. But then, XHB pulled back again. This time, the ETF found support $69 before trading sharply higher. This is the “handle” part of the formation.

Check out the price chart below so you can see exactly what I mean.

As of writing, XHB is trading around $82. That means prices are very close to brushing against the neckline of the pattern.

Trading a cup and handle is very similar to other patterns with necklines such as double tops/bottoms and the head and shoulders.

Here’s an example I sent you on November 20…

Here’s what happened next:

The key to trading these patterns is to wait for prices to break beyond the neckline. Once they do, that’s a great signal to take the trade.

My analysis suggests that XHB has considerable upside. At a minimum, look for prices to run to about $98. If the price action remains strong, then $108 would be the next objective.

On the other hand, prices shouldn’t break back below the handle part of the pattern. In the case of this particular trade setup, that would mean a price level of around $69.

If XHB breaks below $69 after breaking through the neckline, it probably means we’re looking at a failed breakout and the market could trade much lower. In such a scenario, it’s wiser to just get out of the trade and wait for another opportunity.

Happy trading,

Imre Gams

Source: Jeff Clark Trader