Today I present you with the thesis that TA works even when the perception is that it doesn't.
Now that seemingly oxymoronic statement isn't so contradictory once dissected and explained. The key word in that statement is "perception", and the entire logical premise turns precisely on what the popular conceptions and expectations are for TA. If the perception is that a given pattern should lead to a given outcome, then there could be times when one could say it "doesn't work". If, however, one treats any given pattern from a probabilistic standpoint always recognizing that a pattern can always break both ways, then the pattern itself never fails (the only thing that fails is the preconceived notion that one imposes on the pattern with regards to how it should resolve).
Any given pattern (or level, or Fibonacci retracement, or trendline, etc.) can break either way. As I mentioned in my original article on the subject titled "Who Said TA Doesn't Work?", the key is to treat TA as something that identifies, and not something that predicts. The key is pattern recognition (or level, or Fibonacci retracement, or trendline, etc.) and then treating it as such, nothing more, and nothing less. I wrote an extensive post on the subject on my blog back in March using the NDX as a case study that I think continues to serve as a nice primer on the subject and I recommend reading it. It continues to serve as a good primer not just because it thoroughly outlines the thesis, but also because, now, after having broken to new highs since that time, it continues as a great example of how the TA wasn't wrong at all in spite of the possibility that some may perceive it to have been wrong. All the TA on those charts continues on today's charts! Nothing has changed other than where price is relative to those technical levels and patterns originally drawn. TA properly done shows important levels and patterns, but it does not predict what price will do around those patterns and levels.
Currently we are working with triangulating (coiling as some also refer to it) patterns. In "Who Said TA Doesn't Work?", I highlighted some monthly patterns that have gone to target, and ended by pointing out the intraday triangle on the SPX, its possible target calculations, and a confluence of support. All possibilities, and I also reminded readers:
"... it [TA] works in that it identifies levels, patterns, trends, and the like, but it doesn't guarantee results - you need to adapt to how the market responds at any level."
I can't stress that enough; hence, my motivation for writing this follow-up. Do not be lulled into thinking that any pattern should do anything in particular! There is nothing more dangerous in my opinion than imposing one's own perceptions on the market. You must watch what price does around any given level and then react appropriately and without bias!
Take a look at the 15 minute SPX chart below and note how a minimum target has already been hit (using the 5/25 low and 5/28 high as the max. width measurement) and how price may be firming and forming a double bottom, but yet remains within another smaller triangular pattern.
While these patterns will stay on the chart forever, they do not, however, tell you which way price will break, and that's where I believe people get confused and begin to think that TA somehow doesn't work. What doesn't work is when a preconceived outcome is imposed on the market a priori. Remember, TA identifies, and then it's the trader and investor's job to react appropriately to how the market behaves with respect to the TA identified.
In finishing, I'd like to also refer to my first article here on Safehaven entitled On The Lookout For A Spike High Top In Equities. As I've said above, I can't stress enough that TA is no guarantee with respect to what will happen in the future (nor does it purport to be), and with respect to the spike high top possibility outlined in that article, please keep in mind the same thing: the pattern is there alright, but that doesn't predict any particular outcome, and much less that the pattern has already completed. Please see my most recent post on the subject where I focus on what I consider to be THE KEY QUESTION with regards to the spike high phenomenon: "are the current charts closer to the historical comparative tops, or still just at the last correction/consolidation phase before the final run?"
Don't fall into the trap of thinking that TA somehow projects anything! Historical comparisons may give us probabilistic projections based on past performance (that's why all disclaimers state that "past performance is no guarantee of future results"), but TA, when dealt with in its purest sense, that of pattern recognition, always fulfills its task of identifying the pattern - even when some think it doesn't because they're thinking some particular outcome is 'included in the deal'. Don't be mislead. There's nothing magic with TA - it's just a collection of some very effective tools, that when combined with hard work, may help in giving you an added extra edge.