Thursday, December 20, 2018

It’s Just Too Perfect...

Technical chart analysis can often produce useful insights.  Patterns such as Head and Shoulders are considered powerful predictive tools by technical gurus.

The following chart of S&P 500 exhibits a picture-perfect top Head and Shoulders pattern, confirmed by the lower readings of the Relative Strength index and the sharp breakdown below the “neckline”.



*****Updated Chart*****


A technical analyst would have little to argue with such a pattern and would very likely recommend getting out of stocks and/or shorting.

However... it just looks “too perfect” to me. Obviously, I’m not the only one looking at this picture and I bet a lot of the recent extreme bearishness emanating from market analysts is already incorporated in this chart.

So, here’s a lesson I’ve learned in my 35 years in the business: if something looks obvious AND everyone agrees.... it is highly likely to not happen.

******UPDATED DEC. 22.... the breakdown continues below the neckline.  The speed of the decline is the fastest since the 2008 plunge.*****

4 comments:

  1. People are pre-programmed to pick up patterns of predictability. ~ Pat McNamara

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    Replies
    1. Good point. Maybe that’s the foundation of technical chart analysis!

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    2. Indeed, and that's why technical patterns so often fail.

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