- Colin Denney
- 2 days ago
Colin Denney (colin@stetinvest.com) - April 2025
We have all heard this quote or some variation of it. Often it comes in the context of
political ideas and leaders or in the context of historical events and their relevance to current day happenings. As active managers, we likely adopt this concept by studying
economic history and using different traditional technical analysis techniques to see how prices have reacted under varying conditions. An often-overlooked application of this concept can be found in its simplest form, the historical and repeating price patterns of individual instruments, generally not known to exist.
Generally, patterns that are used today by traders and technicians are limited to universal patterns such as head and shoulders, double tops and bottoms, flags and others along with anomalies such as periods of seasonal strength and weakness. While these can be useful, what if a road map could be given for each instrument with its own unique pattern, like a fingerprint?
It can often be quite difficult for those unfamiliar with this style of historical and repeating pattern analysis to see the patterns on a raw price chart. It is helpful to use markers to indicate different positions within a pattern cycle. Take for example the charts below of Vertex Pharmaceuticals Inc
(VRTX). Note the three previous repeating cycles that have the same pattern indicated by the lines to show similarity in positioning. Additionally, the fourth cycle has been forecasted beginning with the red lines in late 2020.
More than four years later, we can see that the price again followed its historical repeating pattern just as forecasted. It is helpful to review additional examples from recent history of these before and after pattern forecasts to give a more thorough understanding of how powerful this type of analysis can be. Below you will find before and after charts for TSLA, GLW, and GE. These are just a handful of examples out of the thousands of unique patterns that we have witnessed in the market.
The Tesla (TSLA) chart below shows our forecast beginning in October 2024. Over the next two months, the stock followed the forecast for a nearly 100% parabolic move into December.
TSLA
GLW
GE
Each of these before and after examples were covered months and years in advance. Pattern analysis has proven itself as a viable form of forecasting price movement in a way that many other methods have failed. These patterns can be seen in all tradable instrument types from stocks to futures, to the broader indexes just as we see patterns appear throughout the natural world around us.
As we look deeper into these patterns, there are universal laws that we have observed. One of the most important factors to consider when projecting these is the irrefutable fact that these patterns expand in size as price appreciates. Similarly, we see the opposite as price contracts. This is a key concept known as scale invariance. In physics, scale invariance refers to a system’s ability to retain its fundamental characteristics regardless of the scale at which it is observed. In the examples above, we see this most notably in Corning, Inc. (GLW). During its earlier years of the pattern cycle, its expansion moves were smaller and had a flatter angle. As price expanded and we moved out in time, these expansion moves grew and additionally had an angle adjustment. Each time that the stock traded out of its corner lows, the expansion move was steeper and higher than all previous cycles. This is due to the law of scale invariance.
While this concept of scale invariance is vitally important to understand and consider in pattern forecasting, there are other outside factors that can arise. As such, a forecast may need adjustments as new price data presents itself. In the case of General Electric Co. (GE) for example, it seems to disregard this law during its most recent expansion move. This expansion is larger and has a steeper angle even though price has experienced continuous contractions since the tech bubble in 2000. Why then is this contradicting the law of scale invariance? The answer can be found in the COVID low of March 2020. Notice how in late 2018 the stock initially bottomed and had made significant progress out of its low. Due to its pattern, a choppy channel was expected on its way out of these lows. However, the COVID sell-off added additional selling pressure and caused an oversold condition to occur in the form of both price and time. Not only was the stock oversold from a price standpoint, but it was delayed in its move out of the initial low. As a result of this, we saw the price expansion move significantly steeper and further than previous cycles to make up for this oversold condition. Newton’s third law of motion says, “For every action there is an equal and opposite reaction.” That is exactly what has happened in the case of GE and its pattern. It is simply reflecting the oversold condition brought about by COVID. This can be seen across thousands of instruments in the market.
As active managers, one of our most important goals in managing assets is to manage our risk exposure. Many achieve this by looking to moving averages, referring to exposure reports, or reviewing the performance of “risk-on” asset classes such as high yield bonds. Pattern analysis should first and foremost be used as a risk model. In the case of Tesla for example, beginning in October of 2024, we recognized that the stock was positioned in a place where, historically, it has achieved the greatest price expansion in the shortest time-
frame. By recognizing this, we can avoid exposure to the stock during periods of extended consolidation or when the stock has an elevated risk of being sold off. As TSLA traded up near the $500 level as forecasted in the second scale pattern, it was an indication to begin reducing risk as the stock was nearing the top of its measured expansion phase. As of mid-March 2025, the stock is now over 50% off its December December 2024 highs
and continues to repeat its pattern.