Obvious Patterns Tend to Fail

As I sat there watching Monday's market, I kept thinking, this stinks! I was trying to find something good to say about the rally, but the only thing I could come up with was that the Dow finally rallied. That's not much, is it?

Monday's rally had poor breadth, lousy volume and was the fourth day in a row the market sold off in the last hour and closed on its lows. And here's the real killer: Everyone was and still is looking for a rally.

So let's have a look at this rally everyone is expecting. We all know that folks rarely see patterns on charts before they develop.

More often they see patterns after they develop, or at least when they become more obvious. A week ago, I showed a potential head-and-shoulders top in the Dow and S&P 500 that might develop off an oversold rally.

Both of these charts are sitting on support. What if we rally here? Won't it look like the right shoulder of a head-and-shoulders top? You can imagine what will happen if we can muster a rally in here: we rally to, say, somewhere between 10,650 and 10,750 on the Dow and start heading down (my scenario from Monday's column, where we come down again in early April). How many times do you think you will hear someone say that we have a head-and-shoulders top developing in the Dow and the S&P? Every chart person out there will be showing it.

And we all know what happens: It becomes the most obvious pattern out there, the one everyone is watching. But they're not only watching it; we have to assume they will be acting on it as well. And if such a scenario occurs, the negativity would skyrocket. So it wouldn't be just the folks from the American Association of Individual Investors who have opted out of bullishness. The Investors Intelligence crowd would probably pull back their bullish horns as well, something we have yet to see so far.

---

Helene Meisler writes a technical analysis column on the U.S. equity markets and updates her charts daily. Meisler trained at several Wall Street firms, including Goldman Sachs and SG Cowen, and has worked with the equity trading department at Cargill. At time of publication, she held no positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. She appreciates your feedback and invites you to send it to [e-mail].