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The inverted cup with handle pattern is tied for the best performance with high and tight flags
in a bear market. In a bull market, the performance is middling; the failure rate is a bit high and the average decline
is meager. For more information see pages 164 to 178 of the book
Encyclopedia of Chart Patterns, Second Edition and the following...
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 Inverted cup with handle chart pattern
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Important Bull Market Results
Overall performance rank (1 is best): 8 out of 21
Breakeven failure rate: 11%
Average decline: 16%
Pullback rate: 54%
Percentage meeting price target: 47%
Identification Guidelines
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Characteristic |
Discussion |
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Price trend |
Just over half the time, price
trends upward leading to the pattern. |
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Rounded turn |
Look for a smooth, rounded
looking turn (an inverted cup), but allow exceptions. |
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Cup rims |
The two cup rims should bottom
near the same price. |
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Cup handle |
To the right of the cup should
be a handle. |
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Cup retrace |
Handle must not rise above
the cup top but should retrace 35% to 60% of the prior down move. |
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Confirmation |
The pattern confirms as a
valid one when price closes below the right cup lip. |
Trading Tips
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Trading Tactic |
Explanation |
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Measure rule |
Compute the handle height (the distance between the
two red lines in the Measure Rule figure to the
right) and then multiply it by the above “percentage meeting price
target”. Subtract the result from the price of the right
rim low. The result is the price target. |
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Head-and-shoulders top |
If another handle forms to
the left of the cup, you might have a head-and-shoulders top chart pattern with a fat head, the shoulders being the cup handles. |
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Short |
When price closes below the right
rim low, short the stock. |
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Trendline |
Draw a trendline down (if possible)
from the handle tops and extend it into the future. When price closes above this
trendline, cover your short. I show this in the Trendline figure to the right as
price crossing the red line. |
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Measured move down |
The handle may be the corrective
phase of a measured move down chart pattern. Use the MMD measure rule to compute a
price target. |
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Yearly low |
Performs best when the breakout
is near the yearly low. |
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Even rims |
When the cup rims bottom at
the same price, the chart pattern tends to perform better than do those with uneven
rims. The Trendline figure shows this as the even lows at A and B. |
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Pullbacks |
Pullbacks hurt postbreakout performance. |
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 The Measure Rule
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 Trendline
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Example
The above figure shows an example of an inverted cup with handle chart pattern. Price makes a gentle rounding turn,
forming the inverted cup. Following the cup is the handle, a flat region in this example that stretches from March and
into April. Price jumps upward for several weeks before starting a new trend downward.
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