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 the price falls to the base of the cup, it then gets a pop and retracement, which forms the handle. Watch for the base of the cup to fail for confirmation.
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What Are Inverted Cup and Handle 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 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. Inverted c&h patterns are bearish continuation patterns. It 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.
They give warnings beforehand, especially if a stock pattern breaks down.
Check out the inverted cup and handle pattern on $SPY on 5-13-2020. It’s a very nice bearish continuation pattern that caught a lot of traders off guard who didn’t see it coming. You can see the really large upside-down cup pattern forming on the 15-minute chart. Then, there was a sharp price decline, followed by consolidation, which formed the handle. The handle forms a bear flag pattern. Then, price action failed the flag, hence the bearish continuation downwards.
There are curved drawing tools that you can use within your brokerage platform to draw the rounded top.
Basics
Inverted head and shoulder 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. The stock would break out of the handle because the inverted cup and handle are a bearish pattern. Cup and handle patterns break down all the time. The handles fail, so make sure you know what the candlesticks forming the handle tell you. The 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. Sometimes, 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.
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The Handle and What It Means
The handle on the inverted cup and handle patterns form on the right side, just like its counterpart pattern, the cup and handle. The handle could also form secondary patterns, such as a flag or wedge.
The cup hits the support level with a minor correction forming the handle. The stock will fall further once the handle completes and the pattern doesn’t break down.
The handle forms support and resistance, so look at the candlesticks forming the handle. What clues are they giving you?
Wait for confirmation of a direction after the handle breaks. Sometimes, the stock will return to test the new resistance level the handle forms to see if it’ll hold.
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How to Trade Inverted Cup and Handle Patterns
- Watch for consolidation to form an upside-down cup pattern
- Watch for the price to hold the bottom of the upside-down cup and form handle formation
- Next, look for price to break down out of the handle area
- Then, watch if the price can break support at the base of the upside-down cup and hold
- Traders take a short position once the base of the cup breaks and holds. Place stop at the top of the handle
- Some traders take a long position once the price breaks down out of the handle, placing a stop at the top of the handle
Inverted Cup and Handle Entry & Stop Levels
This is a daily chart example of $CAT. The top of the inverted cup formed between July and October. Midway through October, the flag formed a consolidation area, which became a bear flag. Then, the price broke angular support to the downside, which confirmed the inverted cup pattern.
Since the inverted cup and handle pattern is a bearish pattern, traders trade it to the short side. This example shows a short entry as the price failed the handle area. The stop level would be a candle close above the top of the handle area.
Base of the Cup Failure
This chart example of $CAT shows a short entry as the price fails the base of the cup level with a candle close above the handle as the stop. Is it better to short the handle of the cup or the base of the cup? It all depends on how clearly defined the handle area is. If it’s not clearly defined, it could be better to wait for the base failure. However, if it shows clearly, then it could give you an earlier entry and give a clearer stop level.
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 up to 6 months to form. The handle itself takes one week up to 4 weeks to form.
So, this pattern can take a while to form. That’s why seeing other patterns forming inside the inverted cup and handle is important. 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. Ensure the resistance levels hold and the pattern doesn’t break down.
Frequently Asked Questions
An inverted cup and handle is a bearish pattern. It's the opposite of a cup and handle pattern, which is bullish. When the price fails the base of the cup, it's considered a bearish signal.
The inverse head and shoulders pattern has an 82% success rate. Patterns often fail, so it's important to use proper risk management techniques.
An inverse cup and handle is a bearish pattern. It's often referred to as an inverted cup and handle pattern. It's the opposite of a bullish cup and handle pattern.
