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“Textbook Patterns” are Broken Clocks

Mainstream media is infatuated with “textbook patterns”. Another one of those was presented yesterday as an ominous sign. But “textbook patterns” are like broken clocks.

In January of 2017, a technical analyst appeared on financial TV and declared the end of the stock market uptrend. His justification: a massive “textbook rising wedge” over a 9-year period, as shown below.

When I saw that article I was not surprised although I could not stop laughing. Mainstream media is infatuated with this type of patterns especially when they fit their agenda. But I have done my homework many years ago simulating the performance of this and other classical “textbook patterns” and I know they are random formations with no forecasting power.

The technical analyst who presented the above pattern continues to be bearish. Like a broken clock, one day he will be right. But the index has risen 29.6% (36.4% on a total return basis) since this pattern announcement in mainstream media, as shown below.

Last week, another one of those “technical analysts” took turn to present a “bearish rising wedge” in S&P 500 on major financial TV, as shown below.

Is this a “rising wedge” to start with? I am not sure but the vertical axis was squeezed enough in the presentation to make it look like one, as shown below.

Now this is embarrassing in my opinion for both the “technical analyst” and the TV station. This is worse than astrology. They could do better bringing in an astrologer or card reader.

“Textbook patterns” are like broken clocks; they are right twice a day. I have several examples of major failures in my book Fooled by Technical Analysis (offered via subscription.) In a nutshell, these are random formations.

Next time you hear “textbook pattern” there is high probability you are dealing with an old timer who is not in touch with modern market environment.

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