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Technical Analysis

Brownian Motion or Real Chart Patterns?

The bond market disappointed chartists in March of 2012, when a complex head and shoulders top failed after a false breakout. TLT, the popular bond ETF, rallied about 18% after the pattern failure. Currently there is a breakout associated with another major pattern in bonds, an inverse complex head and shoulders (or for some a double bottom). Is this breakout the real thing? Will classical technical analysis deliver profits this time?

The complex top and bottom are indicated on the TLT daily chart below (enclosed in shaded circles):

TLT_20131030

It may be seen from the chart that the complex top formed in 2011-2012 failed miserably after a false breakout. This was one of the worse recent failures of classical chart analysis, not so much because of the failed breakout but because of the strong rally that followed it. It made the pattern look like a technical trap.

Currently, there is a breakout of another complex formation that points to a bottom in prices. Strong resistance is near the low that marked the previous failed breakout, at $109.69. A failure of this pattern will deliver another strong blow to classical technical analysis, added to a series of recent ones that indicate that such patterns may actually be random formations from the Brownian price movements caused by high frequency traders. I think a final verdict is still not out but we are coming close to that point.

Disclosure: no relevant positions.
Charting program: Amibroker
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