Do the pattern traders have it right?

Bill Cara
 May 5, 2021 8:31 am

Over the years, I have met my share of traders who swear by patterns as indicators that aid their decision-making. There are many who believe in the Elliott Wave, the moving average crossovers, the head-and-shoulders, the Point-and-Figure, cup-and-handle, and double and triple tops or bottoms, among others. specializes in pattern trading.

Yesterday in my blog, I noted that so many talking heads and bloggers were all over the weakness in the ARK funds of Cathie Wood. Perhaps they see ARK as a boom or doom precursor? Perhaps they are envious of her track record? Perhaps it’s just a matter of clickbait media?

Yesterday, had this to say about ARKK, Cathie Wood’s Innovation Fund:

ARK Innovation ETF forms bearish “Head and Shoulders Top” chart pattern

May 04, 2021

Trading Central has detected a “Head and Shoulders Top” chart pattern formed on ARK Innovation ETF (ARKK:NYSE). This bearish signal indicates that the stock price may fall from the close of $113.29 to the range of $53.00 – $64.00. The pattern formed over 220 days which is roughly the period of time in which the target price range may be achieved, according to standard principles of technical analysis.

Tells Me: The price seems to have reached the end of a period of “distribution” at the top of a major uptrend; the break down through support signals a reversal to a new downtrend. The Head and Shoulders Top is created by three successive rallies in the price following a significant uptrend. The highest high (head) is in the middle, flanked by two lower highs (shoulders) at roughly the same level. Volume is highest as the price makes the first two rallies, then diminishes through the right shoulder. Finally volume surges as the price closes below the neckline (drawn between the two lows) to confirm the reversal.

This bearish pattern can be seen on the following chart and was detected by Trading Central proprietary pattern recognition technology.,volume:short&zom=tighttrend&tid=7PWGlVCRzxUKj%2F7tsSmpzaQvCVKHNQd2At0%2BElFUNuQYiFQJ2FXv65t1Y3rMSH4JIOICGoMu9MzpwsvywL4wKXahaOHf%2Fzyg1ZLJtCFPCfI71%2F5Loapl1etZwLCqAyGjQFn70OLJy9o%3D&lang=en&mnt=

That’s a severe fall in price that forecasts, so let’s follow it for a few months to see if the head-and-shoulders pattern analysis works out.

My concern about pattern trading is that it all works… some of the time. That leads to traders who jump from pattern to pattern where confirmation bias can get them into a lot of trouble. I believe it is best to stick to a couple of indicators and use them consistently and for confirming each other at an important decision point.

I use RSI, TSI, and MACD. This type of technical analysis is not rocket science because an indicator is just that — it’s an indication, not an absolute. Trading is also an art where interpretation comes from experience. You only get that experience through repetition, which you never get by jumping among many indicators or using certain indicators on many stocks rather than a small watchlist where you can get to understand price motion.

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