Last update: August 2021

All this talk of topping patterns is bringing back memories. Painful ones. The kind you lock away in the deep recesses of your mind in hopes they don’t see the light of day. Unfortunately for me – yet fortunately for you – this particular memory must come out. Current market conditions and your insatiable appetite for knowledge demands as much.

It was a warm summer morning. The year was 2009. Birds were chirping, the sun was shining, and Papa Tyler was feeling adventurous. During his daily scouring of the landscape an opportunity was spotted. Like a siren song it called to him. And like a stupid sailor he just couldn’t resist.

There it sat. A head and shoulders pattern clear as day beckoning to bears one and all to come and make a mint. Not that the bears hadn’t already banked more than enough coin. The crash of ’08 padded their pockets quite nicely. But, it looked as if yet another plunge was commencing and the greedy buggers wanted MOAR. Poor Papa Tyler was caught up in their avarice.

And so, on that fateful day in early July he sallied forth and sold bear calls galore. After all, the pattern’s prescience was virtually assured. Like a good little trader he even waited for the neckline to be pierced.

And then, this happened:

Turns out the pattern was a ruse, a bear trap of epic proportions. And Papa Tyler was its victim. I can still hear his squealing to this day.

Heed his warnings as they echo through time:

1. Warning #1: Patterns fail, plan on it.
2. Warning #2: There’s nothing wrong with being wrong. There is something wrong with staying wrong. So have an exit plan, mmmkay?
3. Warning #3: Never – no, never – place so many trades or such a large bet that any one failed pattern will inflict irreparable damage on your portfolio.

Now, a few items of note on our current predicament. The stars have aligned. A head and shoulders pattern has materialized after a big run-up in the market right as the historically worst six months of the year commences. The bears couldn’t have scripted this any better if they wanted to.

So, sure, be cautious. But recognize when the oft-watched topping pattern in the SPY has failed. Or, recognize when it has become so messy as to render its doomish predictions moot.  Personally, I’d consider a break of the right shoulder ($208.60ish) on the SPY an invalidation of the whole thing. If you want more confirmation the bears have lost their grip I suppose you could wait for a break of the head at $211.

Obviously I don’t know if this whole thing will become an Admiral Ackbar worthy trap or simply a more complex top. What I do know is the aforementioned trio of warnings, that triumvirate of wisdom, mustn’t be forgotten.

For me, Papa Tyler’s stump of a leg is reminder enough of those dastardly bear traps.

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