Here’s a good object lesson provided by a specific stock, Wells Fargo:
Notice the rounded top on the left (it’s hard not to, since I’ve highlighted it). It’s a beautifully-formed pattern, but what’s most important is what follows the pattern. That is to say: nothing.
Classic technical analysis would say that the stock was heading much lower, but it utterly defied its own “topping” pattern and ripped higher forming – – how about that! – – another topping pattern!
Which is precisely why I’m doing nothing with it. Because stocks, like people, have personalities, and the behavior of a financial instrument after a certain pattern tends to be mimicked at future instances. And what Wells Fargo has shown us is that it doesn’t really behave itself “normally” after such a pattern, such such patterns should be eschewed.
There are other stocks which have shown multiple instances in which, following a specific technical setup, they behave precisely as you would expect. In those cases, the logical response is to try to exploit the pattern. But when an instrument yields nothing but a “dud”, you can assume duds in the future.
