Sunday, November 16, 2008

Those pesky patterns

I noted some time ago that Trading patterns was becoming too popular. I'm becoming even more convinced that it is going to get harder to succeed in the markets by TA alone. By that I not only mean pattern recognition but levels of support and resistance are not going to mean much during this bear market.

I suspect this bear is going to take away almost every tool that investors use to try and get an edge in the market before it's over. And yes that may mean the COT reports go out the window also.

I've included a recent example of what I'm talking about.

In the first chart we see a nice triangle consolidation forming. Often these are continuation patterns. Since the market had been falling apart it seemed reasonable to assume that it was going to continue to fall apart. The pattern breakdown suggested this was likely the case.

However moving on to the second chart we see the market quickly negating the triangle breakdown. A negation of the triangle should have been a very positive sign. A V shaped rally at this point would not be unexpected.

Umm not so fast with the rally. The triangle negation got negated. Whew is anyone else getting dizzy?

Granted this is just one example. But I think this kind of TA will only get worse as this bear market continues. I also expect levels of support and resistance to regularly fail only to quickly reverse course as this bear wears on.

One example that I think will be tested at some point is the 1200 level on the S&P. If we get the large rally that I think will separate the 1st and 2nd phase of the bear market it seems logical to expect the 1200 level to be tested. That was a major breakdown point. I'm guessing there will be many a bear that will go heavily short at that level.

I also suspect the market will likely push right through that level and take all the bears to the cleaners before reversing at a higher level and dealing out the same beating to all the bulls who will view a move above 1200 as proof the bear is dead.

I'm afraid this is going to be one tricky market to negotiate in the next couple of years. The extreme left translation of the current 4 year cycle suggests that the ultimate bottom when it does arrive is going to be much lower than anyone thinks or can even imagine at this point. However the road to that end is going to be anything but straight.

I'll elaborate in more detail in the weekend report.