S&P 500 Technical Bear Trap Rekindles Debate Over The Validity Of Chart Patterns

A recent failed head and shoulders technical pattern in the S&P 500 has once again raised the age-old debate about whether technical chart patterns are actually useful to traders.

MarketWatch reported the bearish head and shoulders pattern that the S&P 500 formed from March to May was quickly followed by a breakout to new highs.

“Nowadays, chart patterns offer no direct edge simply because charts and related analysis are easily accessible,” author Michael Harris said.

Related Link: Why Financial Experts Often Have Worse Market Judgement Than Retail Investors

Not 'That' Type Of Bear Trader

Insitnet LLC technical analyst Frank Cappelleri believes traders simply have to look for confirmation beyond a single pattern.

“When watching technical indicators we look across various indexes to make sure that a specific pattern is not isolated,” Cappelleri explained.

“Recent breakouts above April highs in small caps and mid caps confirmed that the S&P 500 is likely to break out as well.”

Bearish technical patterns such as a head and shoulders formation that break down quickly are known as bear traps and an often result in quick bullish short squeezes as traders scramble to cover their short positions.

The golden cross pattern is another traditional technical pattern that formed a bull trap back in December when the S&P 500 dropped more than 10 percent within a month of the formation.

So far this year, the SPDR S&P 500 ETF Trust SPY is up 2.6 percent.

Disclosure: The author holds no position in the stocks mentioned.