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Another Flagship Trade That Went Bad

It took more than three years for the flagship pattern to form and only a few months for the trade to turn to a loser. Another lesson from changing markets.

The inverse head and shoulders formation in the 10-Year Note Yield and associated head and shoulders in bond ETFs started to form in January 2015 and the formation was completed around January 2018 in the yield chart and around September of the same year in ETFs such as TLT, as shown below: The massive pattern formations are indicated on the charts. Click on images to enlarge.

10-Year Note yield chart

TLT ETF chart

After a brief rise above the neckline in the yield chart and a break below it in the ETF chart, there was a throwback and pattern formation failure. Losses have been massive fro those that have taken the wrong side of the trade  based on these formations.

This is not the first time this “flagship” pattern of technical analysis fails in recent years. There have been many failures and although failures are expected they are demoralizing when the formation takes three years and fails in a few months. One of the most painful failure of this type of flagship chart pattern was also in bonds in 2012 and caused massive losses to some traders and even funds.

Chart patterns no longer work because they are obvious to anyone with online access.  These formations are due to random-walk with drift. In the early to mid 1900s when those patterns were invented a trader was rewarded for patiently charting them by hand. Charting is no longer rewarded.

For the main cause of failure of classical technical analysis read this article and my interview for Forbes. The website Trader Education section has a number of articles on this topic. There are more examples and discussion in my book Fooled by Technical Analysis.

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If you have any questions or comments, happy to connect on Twitter: @mikeharrisNY

Charting and backtesting program: Amibroker


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