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Rounding Top Pattern In Silver. Reversal Or Continuation?

 February 16, 2012 09:09 PM


A rounding top pattern in SLV and spot Silver daily charts has formed due to price action in the last three weeks. Is this a reversal or continuation pattern? Can we determine that before confirmation or only in hindsight?

I have argued in other posts that technical analysis does not posses high predictive power mainly because all patterns can be either reversal or continuation formations and any analysis of their performance based on the notion of confirmation of breakouts is based on pure hindsight. If one adds to this the fact that chart pattern identification involves some form of subjectivity then the value of technical analysis as a tool for trading the markets for consistent profits is diminished.

[Related -Perfect Storm Driving Gold Higher]

On the other hand, mechanical identification of patterns is also based on assumptions about the signatures of specific formations and in this regard it is also subjective. Thus, anyone who has seriously dealt with this subject understands that technical analysis is an art rather than a science. I argue that the success of some very competent technical analysts out there should be attributed more to their advanced perception of market price action and experience rather than to their understanding of classical technical analysis.

The current pattern in silver is a rounding top and it is often labeled a reversal formation. However, others have claimed that this pattern works better as a continuation in a bull market:

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I suspect this rounding top pattern has formed because the 200-day simple moving average (blue line)  kept on suppressing moves just below it. A close below $32 will signal a reversal. A close above $33.50 will signal continuation. Both in hindsight, of course. You see, technical analysis can tell you nothing at this point about the significance of this pattern. As I argued before, patterns in technical analysis assume their significance only in hindsight.

On the other hand, price action patterns, like pure price patterns and candlesticks, are exact mathematical formation on charts and are not subjective. For this reason their probability of success can be evaluated precisely for any number of markets. In this case the problem of subjectivity is replaced with that of data mining bias. However, I think the latter can be minimized. For an introduction to price patterns click here.

Disclosure: no relevant positions.

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