If you trust technical analysis, then you believe that history is repeatable. Prices will bounce off support, repel from resistance, and entry and exits are based on breakout setups. These ideas are all based on people studying previous structures, reviewing data points, and using history to predict the future. And that is technical analysis in a very simplistic view of things.
Take, for example, Life Storage (ticker is LSI), from 2014 to 2016, where this stock had a pretty incredible upwards move. And we can see this move clearer if we draw the trendline that connects the lows of early 2014, October 2014, July 2015 and Q4, the tail end of 2015. I have drawn in these lows, the support levels on the chart.
We can start to see cracks in this uptrend at the end of 2015 and the beginning of 2016. If you look closely, I’ve circled where you can see the head and shoulders topping formation.
Breaking the neckline and, more importantly, the two-year trendline, was the starting point of the stock price destruction. I zoomed in on the full-bodied bearish candlestick, sometime in August 2016, where the bears took control of this stock price from the high $80 to mid $60.
At the time it would have been difficult to tell that May 2017 was the bottom, especially since the volume wasn’t showing any unusual activity. And typically, the volume is a good starting point to look for any clues of trend reversals.
If the volume wasn’t giving any hints that we were getting close to a bottom, what could we do then? You’d have to use good ol’ technical analysis. If I draw the mid $70 resistance level, we can see a slightly complicated inverse head and shoulders pattern (I’ve circled the shoulders and head). LSI breaks out of this ceiling at around October 2017 – making a good entry point. The excitement wouldn’t have lasted long, because you can see how the stock pulled back soon after.
A price pull back is healthy, and in this case, was warranted since LSI pretty much ran from the bottom in July 2017 into early 2018. What’s worrisome is that the mid $70 area (which was previously strong resistance) was weak support: The stock cracked through this level without any hesitation, and back into the head and shoulders range.
Around July 2018, the stock eventually stabilizes and bounces back, breaking the previous high. I’ve circled the lows, and we can draw the trendline based on these lows. From these few lines, we can see a new bullish trend emerge.
The curse of technical analysis is this: if we believe that history repeats itself, do we believe that LSI is on the cusp of a similar move that we’ve witnessed from 2014 to 2016?
We’ve been fooled once, if we entered on the brief breakout in October 2016. Are we going to be fooled again? Let’s look deeper into the story.
We have an uptrending trendline, but something odd is happening here in October 2018. We’ve seen how LSI was showing signs of a new bullish trend with the higher highs and higher lows.
But what the heck is happening here in October 2018? Equal highs? And in November, similar lows? Rather than see a continuation of the trendline, we are starting to see a tight range beginning to form here. If we draw the ascending support, and the ceiling resistance – we can see a wedge beginning to form. Price hasn’t broken from any support levels, so let’s not get too concerned, yet.
But after being fooled on the breakout in October 2017, it is reasonable to get weary of this new piece of information. What’s more, it was almost exactly three years ago, April 2016, where LSI started it’s significant correction. Three years later, April 2019, we are that that same $100 level, with LSI struggling to maintain the bullish trendline.
Will history repeat and LSI go back into the correction, or will the bulls take over and breakthrough this multi-year resistance level?