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 at the top, and as the price falls to the base of the cup, it then experiences a pop and retracement, which forms the handle. Watch for the base of the cup to fail for confirmation.
What Is an Inverted Cup and Handle Pattern?
An inverted cup and handle pattern consists of several candlesticks that form a U-shaped pattern with the handle inverted, resembling a cup. 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. It derives its name from 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.
Inverted Cup and Handle Basics
They are common chart patterns. A smaller inverse cup and handle can be contained within a larger cup and handle. It has an upside-down U with a handle.
The handle can be traded at an angle or traded straight across. The stock would break out of the handle because the inverted cup and handle is a bearish pattern. Cup and handle patterns often break down. The handles fail, so you know what the candlesticks forming the handle tell you. It forms an upside-down U.
The less V-shaped the cup, the better. You want it to resemble a bowl or have a rounded bottom. Sometimes, you’ll see peaks, so it’s essential to consider 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 significant resistance level because it’s located at the top. If it’s a perfect cup, the lows would be even. However, we know that perfect charts don’t often occur.
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. It could also form secondary patterns, such as a flag or wedge.
The cup hits the support level, forming a minor correction that creates the handle. The stock will fall further once the handle completes and the pattern doesn’t break down.
Handles form support and resistance; therefore, examine the candlesticks that form 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.
Base of the Cup
Inverted Cup and Handle Pattern Trading Strategy
- 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 a handle formation.
- Next, look for the 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 a stop at the top of the handle.
- Some traders take a long position once the price breaks out of the handle, placing a stop at the top of the handle.
Inverted Cup and Handle Example
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 subsequently developed into a bear flag. Then, the price broke through the angular support to the downside, confirming the inverted cup pattern.
Since the inverted cup and handle pattern is bearish, traders trade it to the short side. This example illustrates a short entry because the price failed to hold the handle area. The stop level would be a candle close above the top of the handle area.
Check out the inverted cup and handle pattern on $SPY on May 13, 2020. It’s a very nice bearish continuation pattern that caught many traders off guard, as they didn’t anticipate it. You can see the really large upside-down cup pattern forming on the 15-minute chart. Then, a sharp price decline occurred, followed by consolidation, which formed the handle. The handle forms a bear flag pattern. Then, the price action failed to confirm the flag, resulting in a bearish continuation downwards.
There are curved drawing tools available within your brokerage platform that you can use to draw a rounded top.
Inverted Cup and Handle Failure
An inverted cup and handle is a bearish pattern; however, it can fail and turn into a bullish reversal pattern if the price holds the base of the cup and then rises, breaking above the top of the handle. This is why it’s essential to wait for confirmation that the support level has been broken before taking a short position. Sometimes, a fake-out occurs near support levels and reverses to the upside.
Final Thoughts on Inverted Cup and Handle Patterns
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 between one and four weeks to form.
Therefore, this pattern can take some time 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 crucial role in completing a pattern and confirming a breakout. Ensure the resistance levels hold and the pattern doesn’t break down. Use proper risk management techniques when trading an inverted cup and handle pattern.
Frequently Asked Questions
An inverted cup and handle is a bearish pattern. 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.
