Friday, October 2, 2009

Did it break or didn't it?

Here's one of the reasons I don't put a tremendous amount of faith solely in charts. Granted they are useful no doubt about it. I definitely look at charts, no denying that. But let's face it, if one wants to adjust the x or y axis one can torture a chart into saying just about anything one wants.

Folks charts are just a historical record of what has happened in the market, nothing more. They don't have any mystical power to predict the future. The only reason charts work at all is because enough people do watch them and their trading behavior is governed by them. However if too many people start using them, just like any other tool, they become useless.

Most of you have probably noticed by now that quite often support and resistance levels get broken, only to then reverse. This is an example of a trading strategy that has gotten too popular. The top in 07 and bottom in 02 are clear examples of this.

The biggie for the last several years has been patterns. As most of you have probably noticed they are working less and less as too many people have started to trade them. The head & shoulders pattern back in July is an excellent example. That is one pattern that has had a very high success rate. It failed miserably.

Eventually anything that works too well will get discounted, no exceptions. One of my favorites, the COT reports has become for all intents and purposes useless.

So I have to ask, did we or did we not break the trend line?