Sentiment: Bearish
Direction: Reversal or Continuation
What Is The Inverted Cup And Handle Chart Pattern?
An Inverted Cup and Handle is a bearish chart pattern, commonly found either at the top of a trend as a reversal pattern or mid-trend as a continuation pattern.
Price action takes on the rounded appearance of the bottom of a cup that’s been inverted, with a small correction forming the handle. A break down occurs when neckline resistance is broken.
How To Identify The Inverted Cup And Handle Pattern?
Price action follows a rounded U-top shape to form an inverted cup.
After support is reached, price consoldiates abvoe support to create the handle.
The handle must be located on the right side of the pattern.
Cup duration can last from anywhere between 7 to 65 week. There is a minimum one week requirement for a handle to be valid.
What Is The Psychology Behind The Pattern?
The Inverted Cup and Handle pattern is a bearish chart pattern that can provide traders with valuable insights into the market’s psychology.
It’s characterized by a curved “U” shape followed by a smaller upward-sloping trendline, forming the shape of an inverted cup with a handle.
The pattern typically takes several weeks or months to form and is a sign of consolidation before a potential bearish breakdown.
Traders interpret the pattern as a sign of distribution, where sellers are gradually offloading their positions before pushing the price lower.
The psychology behind the inverted cup and handle pattern is that sellers are becoming increasingly confident in the market’s direction.
As the price begins to consolidate, sellers are distributing shares and building up a base of resistance. This creates a situation where the supply of sellers is increasing, while the demand for buyers is decreasing, which ultimately results in a breakdown to the downside.
The handle of the inverted cup and handle pattern is a sign of consolidation. It indicates that sellers are taking a breather before pushing the price lower.
Encyclopedia of Chart Patterns (Wiley Trading)
21% OffHow To Trade The Inverted Cup And Handle Pattern?
To trade the Inverted Cup and Handle pattern, traders typically wait for the price to break through the lower trendline of the handle with a strong volume surge.
The breakdown should ideally occur on higher than average trading volume. This confirms that there is significant selling pressure behind the move.
Traders may enter a short position once the price breaks below the lower trendline of the handle. A stop loss is placed above the top of the inverted cup.
Alternatively, traders may wait for a pullback to the breakdown level before entering a short position. This approach can provide a better risk-to-reward ratio, as the entry price is closer to the breakdown level and the stop loss can be placed tighter.
However, it may also result in missing out on some of the initial gains from the breakdown. Ultimately, the best approach will depend on the trader’s risk tolerance, trading style, and market conditions.
It’s worth noting that the inverted cup and handle pattern can also result in a false breakdown. In this situation, price briefly breaks through the lower trendline before reversing course.
Traders should be aware of this possibility. Also be sure to use technical indicators and other tools to confirm the validity of the breakout. Access these tools at TradingView.
Inverted Cup And Handle Performance Expectations Explained
A bearish breakout can be expected the majority of the time.
To find potential targets, measure from the highest point of the inverted cup to the cup rim support.
Project the measurement multiplied by 62% to the point of breakout.