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Cup And Handle Pattern Failure

Patrick Stockdale
Written by Patrick Stockdale | May 30, 2022

What Is A Cup And Handle Pattern Failure?

In technical analysis, a cup and handle pattern failure, also known as a "failed cup and handle pattern", is when the price chart of a market forms a cup and handle pattern, the price breaks out and moves slightly higher above the resistance level of the pattern but fails to continue increasing in price and instead reverses and moves lower.

A cup and handle pattern is considered a failed cup and handle pattern when the price reverses from above the breakout level to below the swing low price of the handle of the pattern.

Failed Cup And Handle Pattern Components

Failed cup and handle pattern components

In order to identify a cup and handle pattern failure, there will need to be certain components on the price chart of a market.

The components of a failed cup and handle pattern are:

  • A cup and handle pattern: There will need to be a cup and handle pattern visible on the price chart with a clear cup, handle and resistance level.
  • A price movement above the resistance level: The price of the market will need to break out from the pattern resistance level. This is where traders enter buy positions.
  • A bearish price reversal: The price should fail to continue higher after the breakout. Instead, the price reverses from above the breakout level and moves back down and trends lower to below the swing low price of the handle part of the pattern.

Once these components are visible, the pattern is considered a cup and handle failure as it trapped buyers and stopped them out.

Cup And Handle Chart Pattern Failure Examples

A cup and handle pattern can fail in any market where it forms. Below are visual examples of failed cup and handle chart patterns on the price charts of various markets.

Example Of A Failed Cup And Handle Chart Pattern In The Stock Market

Failed cup and handle pattern in the stock market

On the price chart of Amazon stock above, a cup and handle pattern failed. The price of Amazon stock forms a cup and handle pattern.

It breaks out to the upside but immediately reverses and trades back below the breakout level. The price then trades sideways before eventually collapsing and declining much lower and stopping out any trader that bought at the breakout price of the pattern.

‍Example Of A Failed Cup And Handle Pattern In Forex

Failed cup and handle pattern in forex market

On the price chart of USD/CAD currency pair, a cup and handle pattern failed.

The price of the currency pair breaks out from the cup and handle pattern but fails to continue moving higher in a bullish trend.

Instead, the price reverses and declines much lower. Once the price declines lower than the swing low of the handle part of the pattern, it is considered a cup and handle pattern failure.

Example Of A Failed Cup And Handle Pattern On A Shorter Timeframe Price Chart

Failed cup and handle pattern on short timeframe chart

On the above 5 minute price chart of Facebook stock, a cup and handle pattern failed.

The price breaks out above the resistance level where a buy trigger signals to buy.

However, the price fails to continue moving higher and instead it reverses and declines much lower.

Cup And Handle Pattern Failure Causes

There are a number of reasons a cup and handle pattern can fail. The causes of failed cup and handle patterns include:

  • Lack of buying volume on the breakout: If there is a lack of buying volume on the breakout of a cup and handle pattern, it can cause the pattern to fail as there is no real conviction in the bullish trend continuing as traders are not buying in large volumes with the view that the market will move higher.
  • Economic or political news announcements: Economic or political announcements can cause extreme volatility in a market. A news announcement can cause the cup and handle pattern to fail.
  • A major resistance level above the cup and handle pattern: A major resistance level above the cup and handle pattern breakout can cause the price to struggle to move higher and result in the cup and handle pattern failing.

How To Find Failed Cup And Handle Chart Patterns

The methods to find failed cup and handle chart patterns are:

  • Manually browse through the price charts: A trader can manually scroll through price charts of markets to find cup and handle patterns and then wait to see how the price action reacts after a breakout from the pattern.
  • Use a chart pattern scanner: A chart pattern scanner can help a trader to find a cup and handle pattern. Then, wait to see how the price reacts after it breaks out. If it fails to go higher in price, it could be forming a failed cup and handle pattern.

How To Trade A Cup And Handles Pattern Failure

Failed cup and handle pattern trade example

Some traders prefer to trade the cup and handle pattern failure rather than trading a traditional cup and handle pattern.

To trade a failed cup and handle pattern:

  • Wait for the price chart to form a cup and handle pattern
  • Wait for the price to breakout above the resistance area
  • Watch for the price to reverse and move back below the breakout level
  • Enter a short position once the price breaks down below the breakout level of the cup and handle pattern
  • Put a stop-loss at the previous swing high price that formed after the breakout
  • Set price target by taking the distance between the cup swing low and the resistance level and subtracting that distance to the short entry price

Frequently Asked Questions About A Cup And Handle Pattern Failure

Below are frequently asked questions about a failed cup and handle chart pattern.

Can A Cup & Handle Pattern Fail?

Yes, a cup and handle pattern can and will fail from time to time as no chart pattern is accurate 100% of the time. A trader should be prepared for a cup and handle pattern to fail by setting stop losses to manage risk.

Can A Trader Trade A Failed Cup & Handle Pattern?

Yes, traders can use a failed cup and handle pattern as a bearish signal to enter into a short trade.

When a cup and handle pattern fails, it traps buyers anticipating that the market will move higher. As a result, these traders will need to cover their trading positions for a loss which can push the prices down even lower.

This presents an opportunity for a trader to enter a short trade when the cup and handle fails.

Is A Failed Cup And Handle Pattern Bullish Or Bearish?

A failed cup and handle pattern is a bearish signal in the market. It indicates that the market failed to go higher after the breakout and the price reversed from a bullish breakout to a bearish breakdown and declining prices.

What Timeframe Of Price Charts Can A Cup And Handle Pattern Fail?

A cup and handle pattern can fail on any timeframe of price chart from as short as a 1-minute price chart to as high as weekly or monthly charts.