Profiting in a Bear with the Cup and Handle Chart

Meir Barak  |

The inverse cup and handle is a bearish formation, the reverse of the “cup and handle” described in my previous article. The pattern shows a stock dropping to a low, finding support, then correcting upwards. The stock then returns to a low, creating the shape of an inverse cup. It is then supported again at the low point, and corrects once more upwards while forming the shape of an inverted handle. The small handle’s shape and the amount of time taken to form it are shorter than the time in which the cup took shape, i.e. sellers are more aggressive. Now it returns to a low for the third time, breaks down through support and continues lower. The breakdown point is where we should sell short.

The success of a pattern in leading to breakdown or breakout is measured in the distance the price moved after the breakout.  There is no guarantee that the pattern’s success in the short range will lead to a continuation of the trend.

What have we learned prior to the breakdown? The stock dropped, and therefore we see that it is weak. The stock corrected upward but dropped again, from which we learn that sellers are still in control. The stock rises again, but only less than the previous high (this is the handle) and then returns to a low in a shorter timeframe than it took to reach the previous low. 

So What Have We Learned?

Sellers remain in control and are beginning to sell earlier and lower than at the previous high (the cup shape). The fact that the stock returns to a low faster, and from a lower price, indicates to us that the stock is weakening and that it will probably soon break down through the support line.

Breakdown of Cup and Handle, Myriad Genetics – MYGN

Myriad Genetics, Inc, (MYGN)  begins its trading day with fifteen minutes of sharp lows, finds support, corrects upwards, returns to a low and creates the inverse cup [1]. The stock rises again, drops to a low and forms the inverse handle [2]. The stock breaks down support [3] and continues to drop. Later, it reverses direction upwards. The fact that the stock rises after the breakdown formation is of no importance to us. The breakdown succeeded, and with correct money management, as we will learn later, we can profit nicely from that, too.

To learn more about the stock market and to begin your own journey toward financial independence, visit Meir Barak's site Tradenet and check out his book "The Market Whisperer."  

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
MYGN Myriad Genetics Inc. 31.70 -0.28 -0.88 873,489 Trade

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