The “Inverted Cup and Handle” pattern is the inverse of the “Cup and Handle” pattern and is a bearish technical analysis pattern. It is characterized by a downward price movement that forms the shape of an inverted cup, followed by a small upward price movement that forms the handle.
To identify the “Inverted Cup and Handle” pattern, traders look for a downward price movement that forms the inverted cup, followed by a small upward price movement that forms the handle. The handle should be relatively shallow and not retrace more than one-third of the inverted cup’s depth. The pattern is confirmed when the price breaks below the support level formed by the bottom of the inverted cup.
The “Inverted Cup and Handle” pattern signals a period of distribution, where investors and traders sell a security at a price considered to be overvalued. The handle formation is a period of consolidation that indicates a pause in the selling pressure, followed by a potential continuation of the downtrend.
Traders can take advantage of the “Inverted Cup and Handle” pattern by looking for potential selling opportunities near the resistance level formed by the top of the inverted cup and expecting the price to break below the support level formed by the bottom of the inverted cup.
Traders should also pay attention to the trading volume when analyzing the “Inverted Cup and Handle” pattern. Higher trading volume on the breakout may indicate a stronger confirmation of the trend reversal. However, weak volume on the breakout may indicate a false signal.
It is important to note that not all “Inverted Cup and Handle” patterns result in a bearish trend reversal, and false breakouts can occur. Therefore, it is crucial to apply risk management strategies to manage potential losses.
Identify the Inverted Cup & Handle Pattern-
The key steps to identifying an Inverted Cup & Handle pattern:
- Look for a trend:
The first step in identifying an inverted Cup & Handle pattern is to look for an uptrend in the market.
- Identify the Cup:
Once an uptrend is identified, look for a cup-shaped curve in the price chart. The cup should be rounded with a gradual upward slope, and it should resemble a “U” shape.
- Identify the Handle:
After the cup has formed, there should be a downward retracement in the price, forming the handle of the pattern. The handle should be relatively small and should not retrace more than 50% of the cup’s height.
- Confirm the pattern:
To confirm the inverted Cup & Handle pattern, traders should look for a breakout below the support level created by the handle. The volume should increase during the breakout, providing further confirmation of the pattern.
- Determine the price target:
To determine the price target, measure the height of the cup and subtract it from the breakout point. The resulting number represents the potential downside target.
It’s important to note that not all inverted Cup & Handle patterns result in a significant price move, and traders should always use other technical indicators and fundamental analysis to confirm their trading decisions.
Trading the inverted Cup & Handle Pattern: A Bearish Trade Setup
Here’s a bearish trade setup for the Inverted Cup & Handle pattern-
- Identify the pattern and confirm the pattern:
Look for the inverted Cup & Handle pattern on the price chart. The pattern should consist of a U-shaped cup, followed by a smaller handle with prices breaking down below the support level of the handle. Confirm the pattern by checking that prices have broken down below the handle’s support level with high volume.
- Market Environment:
Before taking the trade, consider the market environment. Is the overall trend bearish or bullish? Are there any significant news events or economic data releases that could impact the trade? Analyze other technical indicators or perform fundamental analysis to confirm the bearish trend.
- Take Trade:
Enter a short trade below the handle’s support level. This confirms the bearish momentum and the potential for the price to continue moving downwards.
- Stop Loss:
Set a stop loss above the handle’s resistance level, usually at a level that is about half the distance between the top of the cup and the handle’s support level. This helps to limit losses if the trade goes against you.
Target profits with a risk-reward ratio of 1:2. Measure the distance between the top of the cup and the handle’s support level and use this distance to set a potential target range. If the pattern is well-defined and the market environment is favorable, the price may reach this target range. However, it’s important to monitor the trade and adjust the target if necessary to maximize profits or minimize losses.
Let’s say that we identify an inverted Cup & Handle pattern on the price chart of XYZ stock. The handle’s support level is at Rs 800 and prices break down below it on heavy volume, confirming the pattern. The market environment is bearish, with other technical indicators also indicating a downtrend.
We decide to enter a short trade at Rs 780, below the handle’s support level. To manage our risk, we set a stop loss at Rs 850, which is halfway between the top of the cup and the handle’s support level. Our potential target range is Rs 700 – Rs 720, using the distance between the top of the cup and the handle’s support level as a guide.
If the trade goes according to plan and the price reaches our target range, we would exit the trade and take profits. However, if the trade goes against us and the price rises above our stop loss, we would exit the trade to limit our losses. It is important to monitor the trade and adjust the target or stop loss if necessary based on new information or changing market conditions.