As one who took a hankering to chart patterns during the early years of my TA training, I have come learn the value and advantage they provide to those that know how to use them. While they can give insight to possible future moves, their unique advantage is providing risk management rules, the key to long term successful investment management.
Below is the 5-year weekly chart of Apple (AAPL). You can see at the start of 2012 it created, over the next 10 months, a head and shoulders (in blue) topping pattern. Notice how the right should could not rise above the 200 day moving average (dma) which acted as strong resistance. Also, how the moving average began to flatten out at the top of the shoulder and then point down as price broke through the neckline. The dramatic increase in selling pressure (bottom pane) pushed prices down exactly to the pattern target, just under 53 an almost 45% loss from peak to trough.
Moving forward to today at the top right corner of the chart, the similarities between now and 2012 are very evident. Price has created a (red) head and shoulder pattern and finding resistance once again, just under the 200dma. And just like in 2012, the moving average has flattened out and is beginning to point down. If the pattern completes, the loss would be slightly less but still a very significant 40% decline. Based upon prior history, we know this is potentially not a good combination and this set up should be raising a warning flag.
It seems like the shrewd investor who recognized this pattern and past history might be thinking they should get ahead of the curve and sell their position right here. Unfortunately, doing so would be incorrectly applying the rules of pattern development. Granted, if the price does break down and head lower, selling now would garner the investor a greater return (by losing less). But the pattern is not complete and until price confirms a break below the neckline only then is should action be taken as the pattern is then considered complete and actionable. For now, if I were invested (and I am not) I would only this on a watch list due to its bearish potential. There is no one right set of risk management rules and every investor should be creating and following ones that fit their investment style and strategy.