How to Position Yourself for a 10-Year Pattern Breakout
Consider these two courses of action.
Monthly Long Term Chart Analysis and Thoughts
I always preach that technical analysis is one part art and one part science: You can never be completely certain on what the outcome of a pattern is going to be. However, we can use historical analysis to make better investments. The great American novelist Mark Twain probably said it best: history does not repeat itself, but it rhymes. Regarding rising wedge patterns, we know that roughly two-thirds of the time they will break to the downside. This also means that one-third of the time they break to the upside.
In accomplishing our goal of capital growth we must do a number of things. We must make returns on our investments, we must protect our investments, and we must limit our losses. While all three aspects work in tandem with each other, there are times when focus must be allocated to one specific approach.
Regarding the current technical setup, I'm not so focused on the 67% chance that these wedges will break to the downside, but more so the impact of each outcome on the average Joe's portfolio and mom-and-pop businesses. The S&P 500 and the Dow are approaching long term resistance lines that have been in place for decades. If we do break to the downside, which I suspect we will, there could be a very significant sell-off with consequences that no one can predict at this point, though I mention some things in the chart above. Alternatively, there is significant overhead resistance in the various indices, and I don't believe an upside break would be too monumental.
That being said, I always like to keep an open outlook and wait for the right opportunity. I'm trying to think of scenarios that would prelude further upside action and I really am not coming up with much. As evidenced by the completion of the recent five-wave uptrend on the S&P that coincided nicely with the various quantitative easing policies, Ben Bernanke and the Fed have had less and less impact. I truly can't see many fiscal developments that would prompt any significant bullish action.
The only scenario I really think that could pump up equities is a series of positive earnings announcements. A lot of expectations, earnings numbers, guidance, etc. have been revised downward over the last couple of quarters, so there is the opportunity for some positive surprises that could lead to some bullish price action. In absence of such a scenario, I really can't think of much else that would prompt a run up.
Look at these charts of positive and negative earnings surprises and the dates and remember what happened following this negative data.
Positive Earnings Surprise
Negative Earnings Surprise
That being said, I am suggesting two courses of action. For steadfast bulls, lock in some profits and/or buy some protection. Missing out on some of the upside is a lot better than losing some of the gains you have fought so hard for over the past couple of years. For the more aggressive traders and investors, start following my updates a little more regularly as I foresee many shorting opportunities coming up in the future. As many of you know, sell-offs are often quick and abrupt, and timing is extremely important when playing the downside.
Further, trading could get very volatile in the near future. Historically, August and September have been very costly for the average investor. My focus will be in taking the highest probability trades that offer the best risk-to-reward scenarios. There will be times when I miss trades, and times when they're not timed perfectly. But, as those who have been with me for a while can attest to, patience pays off in the long run.
Editor's Note: Chris Vermeulen offers more content at his sites, TheGoldAndOilGuy.com and Traders Video Playbook.
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