Trading the Inverted Cup with Handle
The charts below will give
you several different looks at the Inverted Cup with Handle and give
you some ideas on how to trade them. As with the use of any indicator
it takes practice and experience to become comfortable with its capabilities.
In the above
chart (LAB) the blue arrow shows the bar making up the Leftside of the
cup and the red arrow shows the bar making up the Rightside. The redline
shows the Pivot Point extended to the right until the breakout. The
breakout (red dot) is when the stock Closes below the Pivot Point with
better than average volume. This is what a normal Inverted Cup with
Handle would look like in a Bear Market. This particular breakout occurred
during a fair market. Just as a Cup with Handle can perform well in
a Bear Market, an Inverted Cup with Handle can perform well in a Bullish
period. It is not wise to expect either. Notice how the volume increase
as the price drops. This is the only time you may want to Short the
stock for a long period of time (more than a week or two).
Merck (MRK) formed an Inverted Cup with Handle and after breaking out
went down to form a second Leftside (blue arrow). After the second Rightside
was formed the stock broke out to the down side for a nice gain for
those entering a short position. Notice how short the handle was.
ADCT shows what a stock forming an Inverted Cup with Handle will normally
do in a Bullish Market. Notice how the Pivot Point acted as a line of
support. As long as the stock does not Close below the Pivot Point your
long position should be in tact.
After RIG broke out of an Inverted Cup with Handle it formed the Leftside
(blue arrow) of a second formation. This could be a good time to enter
a long position. Notice how the second Cup rose to about half the height
of the first cup. You usually have a few days to get out of your long
position as the stock begans to form the base across the top of the
Cup. When it starts to come down the other side it should be a good
time to enter a short position. This stock gives you a chance to repeat
the process a couple more times as it forms two more right sides. This
is not unusal with an Inverted Cup with Handle in a Bullish Market.
Remember this is actually a failure, as the stock never breaks out to
the downside. This is to be expected of the Inverted Cup with Handle
in a Bullish period. Notice how the bottom of each low point acts as
a line of support represented by the cyan line across the bottom of
the price chart. This is a swing traders dream.
A similar chart
is NBR. The move we want to catch is shown in the grey area. Here again
notice how the Pivot Point (red line) acts as a line of support. Since
it never Closed below the Pivot Point a second long position could be
in order.
UNT shows another
very good situtation. As the stock breaks out to the downside and the
price reverses up and Closes above the Pivot Point a long position can
be entered. This is a chance for a good short gain.
We have tried to show you
some of the ways to trade the Inverted Cup with Handle. As you work
with them you will be able to come up with ideas of your own. You should
be an experienced trader that knows how you will react emotionally to
your trading before attempting some of these trades. Most traders are
uncomfortable Shorting Stocks. It is not natural and can carry substantial
risk so you must know how you will react when a stock does not perform
as you expected. For the experienced Swing Trader the Inverted Cup with
Handle can be traded with reasonable risk to profit ratio.
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