Circling Back Around
In my September 5th blog post after posing the question whether the DJ Internet index formed an intermediate term top, I stated I would circle back around to find the answer to the question. At the time the almost ideal head and shoulders topping pattern had developed and, if played out, pointed to a 12% (or more) decline in the index. I also stated “The two possibilities are 1) a completion move down to T1 or below; or 2) a failure confirmed by a move back above early August’s right shoulder high (before it has completed a move to T1)”. Here is how the chart of the index looked at the time of the post.
Fast forward to the present and here is how the chart looks as of yesterday’s close.
With the benefit of the recent US Stock market weakness, the answer to my question was a resounding yes as the index met and eventually exceeded the pattern’s target, falling 20% peak to trough as measured from the pattern’s neckline. This is NOT a testament to the power of technical analysis being a predictive tool. It is not. What it is though, is a very good risk management tool. At the time of the post an investor in the index, armed with the knowledge of the possibility of a 12% or more decline in their investment, needed to ask themselves if they wanted to accept that risk. If so, welcome to investing, you just experienced a 20% drawdown. Now what? If not and you exited, congratulations, you have a bigger pile of cash to invest when the next opportunity arises. Not if it arises, but when.