The Inverted Cup­-and-­Handle (sometimes called Inverted Cup­-and-­Holder) pattern forms when prices rise then decline to create an upside-­down “U”­like shape (1, 2, 3, also known as the Cup), followed by a shorter relatively straight price increase that bounces from the right lip (from 3 to 4, creating the Handle).

The rising handle forms as a result of mounting buying pressure created when the security retests a low at the right lip of the cup. Once the buyers give up, sellers take over and the security has the potential to decline rapidly.

Trade Idea

If the price breaks out from the top pattern boundary, day traders and swing traders should trade with a DOWN trend. Consider selling the security short or buying a put option at the downward breakout level. To identify an exit, compute the target price by subtracting the pattern’s height (the difference between the highest price and the support levels) from the price at the right cup lip. The confirmation move is the breakout of the price below the right cup lip.

To limit potential loss when price suddenly goes in the wrong direction, consider placing a stop order to buy back a short position or sell a put option at or above the breakout price.