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.*****
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”.
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.*****
People are pre-programmed to pick up patterns of predictability. ~ Pat McNamara
ReplyDeleteGood point. Maybe that’s the foundation of technical chart analysis!
DeleteIndeed, and that's why technical patterns so often fail.
Delete