A 23-day consolidation in S&P 500 bounded by the 50-day and 200-day simple moving averages ended yesterday with an expected upside breakout.
Subscribers to this blog were informed half-way in the consolidation on August 21, 2019, that this pattern has a high positive bias. Although traders have expressed in social media their surprise after the upside breakout, this is often due to reliance on outdated books and material. In our opinion books on technical analysis become obsolete every 10 years. Yet, some people rely on books written 20, 30 or even 70 years ago, even with minor revisions.
The consolidation pattern is shown below:
In last 23 trading days action was bounded between the 50-day and 200-day simple moving averages. Below is a chart with a backtest of the consolidation pattern.
For 20 day holding period the pattern has been profitable 75% of the time on a sample of 20 trades.
The important thing to notice is that before the 90s the pattern often signaled a top as marked by small dotted circles. After the 90s many things have changed in technical analysis. However, the books that were based on an old market regime are still around and at times offer a wrong account of price action.
After the 90s for example, consolidation patterns tend to signal continuation more often than reversal. Same holds even for the flagship heads and shoulders pattern. Briefly, price series momentum dominates chart patterns and decides their signal direction rather the other way around. In fact, chart pattern traders have been a major source of alpha for price series momentum traders, such as CTAs and other trend-followers.
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