CHARTING
Bear, Meet Bull. Pleased To Meet You
Low-Risk Trades Using Cup-With-Handle
Here’s how a popular pattern can present trading opportunities in a bear market.
The year 2008 marked the beginning of one of the worst economic crises of our country’s history. But just like all other economic crises, it too will come to an end, and when it does, those who have prepared will profit in a big way. How? Most stock traders have either traded or at least heard of the cup-with-handle formation. It has long been recognized as one of the most useful technical patterns, and I have been fascinated by the versatility it possesses from the time I started using it.
Like other bullish patterns, however, it fails sharply when the markets turn bearish. Thus, I began my quest for an indicator that would perform in a bear market the same way that the cup-with-handle performs in a bull market. As a result, I developed the inverted cup-with-handle and was pleased at how these two indicators worked to offer some of the best trades available. The problem is trying to find these little nuggets in a timely manner.
The inverted cup-with-handle
By studying the relationship between the cup-with-handle and the inverted cup-with-handle formations, I discovered eight different trades, four associated with each formation. To make it easier to explain, I look at the cup-with-handle as one mother and the inverted cup-with-handle as another mother. Each of these parents have three offshoots called “handle,” “bounce off,” and “reversed.” I put a “C” in front of those associated with the cup-with-handle and an “I” in front of those associated with the inverted cup-with-handle. So we have two families: one made up of cup-with-handle; CHandle, CBounceOff, and reversed cup-with-handle; while the other is composed of inverted cup-with-handle, IHandle, IBounceOff, and reversed inverted cup-with-handle.
Figure 1: inverted cup-with-handle in a bear market. Note how low the price went when it broke down below the pivot point price line. In this case, another inverted cup-with-handle formation was completed.
A key factor is to remember that these children will move in the opposite direction of their parents. For instance, the cup-with-handle is a bullish trade, whereas her offspring are bearish ones. The inverted cup-with-handle is used in a bearish market, and her offspring will be some of the best bullish moves you will ever see. It is this latter group you need to learn about first, as they will make you a lot of money when the market turns around.