Tuesday, June 30, 2009

There They Go Again

The phrase from the late President Ronald Reagan, “There they go again,” seems to be appropriate for describing the latest cry from the market talking heads. A few weeks ago before the market started to pull back, these talking heads are pretending to be market technician and start describing to viewers about how the SP500 is forming an inverted head & shoulder pattern. Now that the market is showing some signs of pulling back or consolidation, these same talking heads are telling people that the SP500 has stalled and it is forming a head & shoulder pattern.

I’m not saying the SP500 could not be forming a head & shoulder pattern. From the SP500 daily chart, I have illustrated the SP500 can just as easily be forming a ‘W’, double bottom pattern from the current price actions.



The point is who is to know what price pattern the SP500 will form until it has made that pattern. All one can do is be on the lookout for possible price pattern and have trading plan ready if a particular price pattern developed. Another key point to remember is the market rarely do what everyone is expect it to do. Therefore, if majority of the market participants are expecting a H&S pattern, then the likelihood for it to form the H&S will be low.

What difference does it makes for what pattern it will form, you might ask. The difference is SP500 rises to 1000 or the SP500 falls to 800. Therefore, if you are listening to the talking heads and playing the market as it is going to form a head & shoulder, then you will be ripped if those talking heads’ prediction is incorrect.

Who is to say these talking heads can’t be right. If these talking heads continue guessing, one of these days, they will guess right. After all, the market is all about probabilities. To win, we just need to learn how to play the edge and manage risk. Guessing is not an effective way to gain an edge or manage risk. While the market is being indecisive, I will trade cautiously with reduced position size and tighter stop.


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