Another Major Failure of Chart Pattern Analysis

Another major chart pattern, this time in Russell 2000 Index, has just failed. Chartists are dumbfounded by the failures of even the best of chart patterns recently. Some have come to understand what is happening but some others still resist not realizing that they are surrounded by robots that respond to data and news feeds in microseconds and can cause a 10 point move in S&P 500 futures in a few minutes not caring if that violates some chart pattern formed over several weeks or months.

I warned about the Russell 2000 Index head and shoulders pattern a couple of weeks ago in the midst of numerous analysts and websites referring to it as a strong sign of a bear market. That warning came after another major chart pattern failure, an inverse head and shoulders in bonds that broke down in a big way, shuttering the hopes of many chartists for an interim victory against the robots.

It may be seen from the daily chart of the Russell 2000 Index above how the head and shoulders pattern formed, the neckline and the first target near 720. Yesterday the market broke violently above the neckline taking many stops of those who considered this levels to mark a major down move.

Surrounded by thousands of robots, most chartists who still practice this alchemy were dumbfounded yesterday by the force that overtook them. I also warned a few days ago the bears to fasten their seatbelts. This is a new market order. Market direction views may change several times during the same day. No chart pattern can be a reliable indication of future direction in excess of a few daily bars. The reason for this is technical and based on the fact that information in price series about the past disappears after a few bars, like after 3 to 5 bars. What you see on the chart after that is a remnant of the past that contains no useful information about the future. My suggestion is that one must either learn how to live with this new reality of robots or become a value investor and never look at chart patterns again.

I would like to say once more that writing these blogs is not a means of attacking anyone person in particular. So I am not attacking you or your chartist friend, I hope that is clear. If you would like to take your chances with chart patterns you are free to go ahead. Be warned though that the next big failure is around the corner. If you do not like my blog, you have the choice of not reading it. I am not going to enter into a fight with anyone. I have no time for that.

Disclosure: no relevant position at the time of this post.

Charting program: Amibroker (Charts created with AmiBroker – advanced charting and technical analysis software.”)


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