V.13:07 (311): SIDEBAR: Cups and caps by Thom Hartle
Cup and cap patterns are technical formations used to signal short-term trades. The cup pattern is the basis for a sell signal when the instrument being traded is in an uptrend, while if the instrument is trading in a downtrend, then the cap pattern is the setup for a buy signal.
First, the direction of the trend is identified, and then the cup and cap patterns are used for the trading signals. The trend is determined by using a pattern called the three-bar net line. Before discussing the cup and cap formations, let's look at how the three-bar net line is identified and used to determine the trend direction.
The three-bar net line is calculated by starting with the current trading day. If the market is rising, making a series of higher highs preceded by higher lows, locate the day with the highest high. The low of this day will be day 1. Look to the left on the chart and find the previous low that is equal to or lower than day 1. That bar becomes day 2. From day 2, compare this low to the preceding low that is equal to or lower than day 2. That bar becomes day 3. ...