Thursday, October 24, 2013

A Long-Term Megaphone Pattern?

A client asks, “Do you put any merit in the large megaphone pattern in the monthly chart of the [Dow Jones Industrial Average] starting in 1992?  One technician said that this was a pattern visible in many charts back in 1929-30.  I realize this is not a timing tool but I’d like to hear your thoughts on it.”

Answer: I put little credence in long-term chart patterns.  Based on experience I've found that chart resistance levels seldom have significance beyond 2-3 years -- maybe 4 years at most.  The megaphone pattern represents distribution according to most technical treatises.  Major distribution campaigns normally run anywhere from one year to as much as two years.  I don’t see how there could be distribution over 21 years, so I doubt the long-term pattern has any significance.  

There could well be distribution taking place right now but the best place to spot distribution is in the internal momentum indicators (e.g. momentum of new 52-week highs and lows) and also in the number of stocks lagging the major indices.  Chart patterns by themselves aren't always instructive for spotting distribution.