December 4th, 2008

Where Are Those Chart Patterns of Old?

A reader wrote today “I seldom read on your blog talking about stock patterns, such as flags, triangles etc.” While the question related to a specific stock he expressing an opinion about, it got me thinking back to the good old days of when we could spot those classic chart patterns and (with a margin of error) rely on the anticipated outcome they pointed to actually taking place. It’s been so long that people tend to forget that these patterns actually used to exist or even think they never had.

Chart patterns come in two flavors:

  1. Reversal patterns (head-and-shoulders, double-tops/bottoms, ascending/descending/symmetrical triangles, rounded tops and bottoms, horizontal channels)
  2. Continuation patterns (pennants, flags, wedges, channels, triangles and, with respect to IBD, cups and handles)

But the market trumps everything else. You’re rarely if ever going to see an inverse head-and-shoulder bottom formation on a stock chart while the market is in free-fall, as it has been since August. You also won’t see a double-top formation on a stock chart so late in the Bear Market cycle; that stock should have and in all likelihood topped out long ago.

You may have recently seen continuation patterns of one sort or another on stock charts between March and June or July and September, periods when the stock market itself was consolidating; you could have expected that those patterns were continuation rather than reversal merely by the signals that the stock market was sending out.

Most skeptics, probably thinking it’s a “gotcha moment”, would probably say at this point that “it’s easy finding patterns after the fact on historical charts, but show some to me today that point to future direction.” My answer is there aren’t many, if any now. Show me the market in a basing process and I’ll show you dozens of reversal patterns being formed.

But having said that, there are a several exceptions (which I offer as examples at the risk of going way out on the limb in the event the market continues its descent):

  • CBST (Cubist Pharmaceuticals):

  • LPHI (Life Partner Holdings)

  • DV (Devry)

At the risk of repeating myself, I hesitate including individual stock charts because of the risk of losing sight of the weakness of the general market. But I was asked by a reader and I am here to serve (BTW, each of the above are both in the Model Portfolio and members of the “Golden Cross” class.

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