Megaphone patterns are highly unreliable, provide little to no edge greater than a coin flip and because of the nature of their shape (expanding swings between tops and bottoms) are miserable to try and profit from. Someone, somewhere once tagged them the “Jaws of Death” because if prices do breakdown, it’s usually a doozy of a decline. Plus, it wouldn’t sell many fear newsletters (like this writer was trying to do) if you called it something like “Baby Steps Lower” now would it?
Because of the megaphone’s undependability, I don’t use them to help manage risk as I would with other patterns. But that does not mean I ignore their message. I borrowed the Dow Jones Industrials chart below from one of my mentors, one of the greatest traders ever (profits >43% per year for more than 23 years) Peter Brandt. For those wondering, the reason the DJIA is being used rather than the broader index is because of the desire to show as much history as possible. The DJIA goes back to 1896 while the SP500 index only goes back to 1957. What should jump out at you is the DJIA has broken out ABOVE the current megaphone pattern (Jaws of Life anyone?) and projects to an upside target greater than 28000.
In spite of the negative fundamentals, political strife and radical changes going on in the world, we need to be open to the possibility that stocks can move substantially higher. That’s the beauty of technical analysis. We don’t focus on the whys but rather just price movement. The whys aren’t fully understood until much, much later and typically after the chance to profit has come and gone. It’s all about making money, not about being right.