Continuation Pattern

Technical analysts love charts. They really love line graphs that track the performance of a commodity or a stock. In fact, they don’t stop talking about them, even if there’s a fire.

By cherry picking historical data on some price charts (while ignoring many others), they’ve come up with a series of “patterns” that they believe predict future events for a stock, commodity, or other asset's price. It's honestly a little closer to palm reading than it is to actual analysis.

Just picture a chart where a line traces a stock historically and then stops at present day. Based on historical patterns that chartists use, one can supposedly forecast that the pattern will continue into the future.

These continuation patterns attempt to indicate that price trends will extend into the future, and tell us if we should buy or sell right now.

Does past performance indicate future events? Uh...no. Which is why every single prospectus deck includes that warning about the reliability of past performance as a predictor of future performance before a fund asks for your money.

Continuations patterns offer zero scientific value, and are similar to playing black in roulette simply because red has come up 13 out of the last 20 spins. It’s pattern bias, and the odds of red and black coming up haven’t changed from 50-50 simply because of previous results.

Discovering whether or not someone is engaged in technical analysis early in an article is an easy way to determine if you should move on to read something else immediately. If continuation patterns were accurate, everyone would use them.

Given that technical analysis is to stock market investing as astrology is rocket science, “continuation patterns” should be ignored by investors.