The inverted cup and handle pattern is a short-term bearish reversal pattern that appears in an upward price trend.
It develops when a peak is reached, the stock price starts to fall, forms an upside-down cup shape, then rallies back to just below the peak before starting to fall once more.
When the price closes below the neckline or support after a downward breakout, the pattern is regarded as valid.
Similar to the cup and handle pattern, the upside-down cup pattern functions similarly, with the exception that the breakout direction is downward rather than upward.
This chart pattern appears more frequently during bear markets and performs best on intraday timeframes.
Indicators In Inverted Cup And Handle Pattern And Their Working
Both long time frames, such as a day, week, or month, and short time frames, such as one-minute charts, can exhibit cup and handle patterns. There are several indicators in the inverted cup and handle pattern:
Cup: A cup is typically U-shaped, though a V-shaped cup may also be considered to be one. The rounded bottom of the upturned cup pattern typically has depths that are nearly equal on both sides. The price wave moves upward, then stabilizes before descending in a downward motion roughly equal in size to the previous rally. This is how the cup is formed.
The ‘rolling over price action is represented by the inverted U, i.e., traders make every attempt for profit-taking in the bull market, and the market, instead of rallying to a new high, goes into a distribution phase. Due to sellers entering the market and driving down prices, an inverted top is produced. When prices start to drop and first touch the support level, the right side of the cup forms.
Handle: A downward handle develops when an upward trend starts from the cup’s lower edge and forms a rounded, triangular, or ascending channel. The handle on the cup that is upside down is the opposite of the handles on a normal cup. Typically, the uptrend is one-third the size of the previous decline. Given that the pattern deviates from the formation’s handle, it indicates the end of an uptrend.
The handle pattern develops inside the trading range as soon as the prices begin to break out and recover after touching the support level to reach new lows.
Is An Inverted Cup And Handle Bullish Or Bearish?
A bearish pattern is an inverted cup with a handle. When the market swings upward and bounces off the important support level, this pattern typically develops.
The price is pushed lower to retest the support level as a result of the increased selling pressure.
When prices close below the support line that serves as the cup’s bottom, a downward breakout is definitively identified.
List Of Things To Note In The Cup And Handle Pattern
Here’s a list of a few things significant to note in an inverted cup and handle chart pattern:
- The inverted cup and handle patterns are not regarded as good probability trades if the cryptocurrency market does not experience a pullback or correction.
- The best time for an inverted cup and handle patterns to trade is after a market price rally. When the pattern appears in a cryptocurrency’s trading range while its earnings are increasing but sales are declining, it is more profitable.
- V-shaped patterns are less effective at producing results than inverted U-shapes. Inverted U-shaped cups are a classic option. Avoid considering the shape to be an inverted U if you have to mentally convince yourself that it is one.
- When the cup’s bottom right-side support level is reached on a day with a higher volume of trading than the 10-day average, the likelihood of this pattern succeeding increases. Similarly, when the handle’s breakdown occurs at a low level.
How To Trade The Cup And Handle Chart Pattern
Investors are advised to sell because inverted cup and handle patterns signify a bearish reversal. Start keeping an eye on the trading volumes, which will decrease daily, once the inverted handle begins to retrace the initial move.
The retracement is smaller than the uptrend that began at the inverted cup’s beginning. The pattern is about to end, as evidenced by the volume decreasing. While deciding to sell the trend, traders can place the stop-loss here. Some potential trading strategies that crypto traders can employ for an inverted cup and handle pattern include:
The trader might take a short position if the trading volume keeps declining for a few days.
When a trader is confident that the handle has meaningfully retraced, indicating the end of a bull market, they may open a short position.
Derivatives can also be used by traders to spread trading bets in the shape of an inverted cup and handle.
Conclusion
Traders should keep in mind that an inverted cup and handle chart pattern, which appears immediately after a distinct uptrend, can help you get the best odds when going short. Trading derivatives on the Delta Exchange enables you to hedge against market volatility by allowing you to speculate on upward and downward price movements or go long and short without actually purchasing the asset. In just a few simple steps, you can set up a trading account with Delta and begin placing bets as soon as you spot a chart pattern, such as an inverted cup and handle or another type of chart pattern.