The inverted cup and handle is considered a bearish reversal pattern in technical analysis. Here’s an explanation:
- Structure:
- The “inverted cup” resembles an upside-down “U” shape, indicating a prior upward trend that has peaked and begun to decline.
- The “handle” forms as a temporary consolidation or slight upward retracement after the downward movement of the inverted cup.
- Implication:
- The pattern suggests a loss of bullish momentum and a potential continuation of the downward trend after the handle breaks lower.
- Confirmation:
- The pattern is confirmed when the price breaks below the support level formed at the bottom of the inverted cup.
- This is often accompanied by an increase in trading volume, signaling strong bearish sentiment.
- Target Price:
- To estimate the potential downside, measure the height of the inverted cup (from the peak to the support line) and project that distance downward from the breakout point.
- Psychology Behind It:
- The inverted cup represents the exhaustion of buying pressure after a strong rally.
- The handle reflects weak attempts to regain momentum, but sellers eventually take over, pushing prices lower.
It’s a strong warning to traders that further declines could be imminent.