Inverted Cup and Handle Pattern Formation
An inverted cup and handle pattern is a bearish indicator and signals a potential downtrend. The reverse cup and handle candlestick is useful to exit the market or open a short position. The pattern itself is the opposite version of the bullish cup and handle and helps in setting up a great trading opportunity.
Inverse cup and handle usually occur after the price reaches new highs, exhausting the bulls. The traders can easily spot the pattern on forex or Crypto charts, although it is a rare occurrence. The inverted cup and handle pattern looks like an inverse “U” shape along with a handle formation.
The upside-down cup and handle have a high success rate and traders usually use it along with Relative Strength Index (RSI) and On-Balance-Volume (OBV) indicators. The pattern takes two to four months to develop on a daily chart but can also be effective in a low time frame.
Keynotes on Inverted Cup and Handle Pattern
- The reverse cup and handle is visual formation and doesn’t belong to fundamental analysis
- The pattern resembles an inverted “U” shape along with the handle and signals bears takeover of the market
- Inverse cup and handle is a rare formation and is an effective tool to open a short position
How Reverse Cup and Handle comes into formation?
The basics of an inverted cup and handle chart pattern rely on the fact that the price fails to break the resistance and go inside an oversold territory. The formation signals bearish takeover of the commodity or Cryptocurrency. The reverse cup and handle pattern starts with an uptrend price movement until it reaches a resistance level. The bulls fail to break the neckline and the price starts to consolidate at a certain level.
The occurrence of Doji candles during consolidation is a norm and sellers usually take profits at this time. After some time, the price starts to fall gradually making newer daily lows. The bears take over the market pushing the price towards the previous support area, in turn, forming the cup.
The new buyers see the bottom out price as an opportunity to make a profit and hop in. RSI at this point is usually 50%-60% suggesting an advantageous situation for the traders. With, the fresh flow of money into the market the price rises in a handle pattern. However, bulls fail to make new weekly highs and eventually suffer at the hands of sellers. The price falls breaking the support channel and starts a downtrend.
Inverted cup and handle pattern in practice
The inverse cup and handle cup and handle pattern is a rare occurrence, because of bearish reversal indicator that takes over the market. However, it has a high success rate and works well after formation. Below is a chart of Ethereum to Bitcoin from TradingView and depicts the inverted cup and handle pattern taking place on the four-hourly chart.
Reverse cup and handle pattern is easy to spot on stock and Cryptocurrency charts. They signal incoming market downtrend and can assist traders to put stop loss. Although their formation is rare, they still provide valuable insights about the market sentiments. The pattern is the opposite of normal cup and handle formation which helps to set up long entry targets.