The Inverted Cup and Handle chart pattern is the bearish version of the cup and handle pattern. Instead of assisting a trader in finding a great long or bullish position and determining an uptrend it helps in finding a great short opportunity.
The basis of the Inverted Cup and Handle pattern is very similar to its bullish counterpart. Usually this pattern is formed after a stock has seen a steady increase in price, sometimes even hitting new high’s. When this occurs it will start to form the hump followed by a steady downtrend. In order to complete the pattern the stock needs to “bounce” or have a bullish reversal and then begin to downtrend again. Before we look at how to play this pattern to your advantage lets first see what an Inverted Cup and Handle looks like:
In the above image we can see a pretty solid Inverted Cup and Handle formation mixed in with multiple regular cup and handle formations(on the right side). This is a perfect example of how a stock:
A. Increases in price
B. Touches new high’s
C. Slowly levels off
D. Trends down
E. Bounces back up
F. Continues the downtrend
Looking at the above chart there are a lot of great areas to buy in but of course it’s easy for us to say that with the whole picture in front of us. However, right before “A” we can see a sharp cup and handle pattern. I say sharp because it forms more of a “V” instead of a “U” this can indicate less stability in the formation but as soon as we see the reversal and the uptrend taking off that would have been a great place to go long.
Right around “B” we start to see new high’s. The reason we start to see the price steady out for a bit is because a lot of those people who bought in months before are happy with their profit gain and start selling off. For a short term play if you had purchased the stock around “A” this would be a great place to sell. The reason for this is because the risk we’re going to see a downtrend increases once we add new high’s into the chart.
So what happens is around “B” sellers start offloading shares and the buyers believe there is a great opportunity to get some cheap shares in so they start to purchase. Where there is buyers there is sellers so we see the price fluctuate a bit in this channel, which is causing the hump to happen. Right Around “D” we see buyers losing confidence in the stock and there becomes more sellers then buyers. This is when people start to worry there is money is going to get tied up so they begin leapfrogging other sellers trying to offload faster. This is why we see a pretty sudden drop in the price. Also, more than likely there was a catalyst that occurred here. It could have been earnings or some form of news.
Now, the price is plummeting and we see we’re back to the same levels as our original cup and handle just before “A”. This is where a lot of buyers originally started to come into the stock and likely decided to get in again at the same levels. What happened was the traders had confidence that the stock was going to rise back up, which it did for a short time, and start its journey back up to the old highs again.
What we see though is the stock increased a bit and it just wasn’t able to continue that uptrend and something caused it to plummet. Again, this could have been some form of news or earnings and without further research we won’t know. That is why it’s extremely important that before you purchase a stock you understand what potential news could come out in the future. It’s not always public knowledge though.
The “F” area, on our chart above, is the downtrend. This is where a lot of shorts start to get in right when the price crosses that thin red line. That line represents the rim of the cup and its a pretty solid line straight across the stock. This tells traders that all confidence in the stock has been lost - at least for now. From there the formation of our inverted cup and handle is done and it starts to form the regular cup and handle pattern that we see up until present time.
The Inverted Cup and Handle is often traded and usually when it plays out it can be pretty successful.
Would love to hear your thoughts as well!