Inverted cup and handle patterns are the inverse of their counterpart the cup and handle. They are a bearish pattern. Picture the cup and handle upside down. The rounded bottom is up top and as price falls down to the base of the cup, it then gets a pop and retracement, which forms the handle. Watch for base of the cup to fail for confirmation. Watch our video on how to identify and trade inverted cup and handle patterns.
What Is an Inverted Cup and Handle Pattern & How to Identify These Patterns?
An inverted cup and handle pattern consists of several candlesticks that form an upside down u formation. At the base of the u formation, a new rising wedge or rising channel forms, thus creating the handle formation. These are easy to spot patterns, but oddly enough, you don’t see many traders sharing these charts on social media or talking about them during their analysis…nevertheless, they are there.
These patterns are bearish continuation patterns. The inverted c&h pattern gets its name because of the shape it forms on stock charts. The inverted cup and handle pattern forms an upside down cup and handle. Watch our video above to learn more about inverted cup and handles.Inverted c&h patterns are bearish continuation patterns. The inverted c&h pattern gets its name because of the shape it forms on stock charts. The inverted cup and handle pattern forms an upside down cup and handle (register for free and take our courses and you’ll learn how to read the stock market).
Thanks to 17th century Japanese rice trader Homma, our charts use candlesticks to gauge traders emotions. In fact, patterns have become such an important part of trading.
With patterns we have a road map of what other traders are thinking and feeling about a stock. As a result, it’s important to remember that patterns do break down. The candlesticks that form the patterns also tell you a story.
They give warnings ahead of time. Especially, if a stock pattern is going to break down. Read our post on how to read stock charts for beginners if you need more information on stock charts.
Basics of Inverted Cup and Handle Patterns
Inverted head and shoulders patterns are common patterns found on charts. There can be a smaller inverse cup and handle inside a large cup and handle. It has an upside down U with a handle.
The handle can trade at an angle or trade straight across. Because the inverted cup and handle is a bearish pattern, the stock would break down out of the handle.Cup and handle patterns break down all the time.
The handles do fail so make sure you know what the candlesticks forming the handle are telling you. Each candlestick tells a story whether it’s long legged doji candlesticks, gravestone doji candlesticks or high wave candlesticks.
Upside Down U
The cup on inverted cup and handle patterns form an upside down U. The less V shaped the cup the better. You want it to look like a bowl or have a rounding bottom (book market our daily watch lists page.
There are times you’ll see peaks so it’s important to remember to look at the overall picture. Those may be double tops forming which is also a bearish pattern. If it can’t break the resistance level, it fails.
The cup bottom forms a pretty important resistance level because it’s on top. If it’s a perfect cup, the lows would be even. Although, we know that perfect charts don’t happen a lot.
Studying real world charts allows you to find the patterns in the imperfections. It also allows you to see patterns within patterns. We teach how to trade candlesticks in our trading rooms. Check out our trading service to learn more.
The Handle and What It Means
The handle on inverted cup and handle patterns form on the right side just like it’s counterpart pattern the cup and handle. The handle could also be forming secondary patterns such as a flag or wedge (read our how to start investing post).
The cup hits the support level and has a minor correction that forms the handle. Once the handle completes and the pattern doesn’t break down, the stock will fall down further.
The handle forms both support and resistance so look at the candlesticks forming the handle. What clues are they giving you? Is it hammer candlesticks or inverted hammer candlesticks? Or is it another indecision doji candlestick?
Wait for confirmation of a direction after the handle breaks. Sometimes the stock will move back to test the new resistance level the handle forms to see if it’ll hold. You want to get a good entry especially if you’re using day trading strategies that work. Take our free candlestick reversals course.
How Long Does It Take to Form?
Inverted cup and handle patterns can take a few months to form. They’re great to spot on daily chart time frames because the chart pattern can take a month up to 6 months to form. The handle itself takes one week up to 4 weeks to form.
So, this pattern can take awhile to form. That’s why it’s important to see other patterns forming inside the inverted cup and handle. This way you can still trade it as it’s forming.
Volume always plays a role in the completion of a pattern and the confirmation of the breakout. Make sure the resistance levels hold and the pattern doesn’t break down.
As we’ve stated numerous times, patterns break down all the time. Look at the big picture to make sure you’re not missing any clues of a break down. Take our candlesticks patterns course.
How to Trade Inverted Cup and Handle Patterns
- How to trade inverted cup and handle patterns:
- Watch for consolidation to form upside down cup pattern.
- Watch for price to hold the bottom of the upside down cup and form handle formation.
- Next, look for price to break down out of handle area.
- Then, watch if price can break support at the base of upside down cup and hold.
- Traders take a short position once the base of the cup breaks and holds. Place stop at top of handle.
- Some traders take a long position once price breaks down out of the handle placing a stop at top of the handle.
Inverted cup and handle patterns are bearish. You want to make sure that you’ve located the direction before you trade it. You don’t want to go long on a breakout only to have the stock fall. The whole idea behind learning patterns is to make trading simpler!
It’s imperative to know candlesticks along with support and resistance. Consequently, it can make or break you as a trader. Take our free online trading courses.