Nothing But Churn with the SPY Put-Call Ratio Extremely Low

The Gray Megaphone is Spinning Off the Navy Blue Megaphone

The Gray Megaphone is Spinning Off the Navy Blue Megaphone

The market’s doing nothing except churning across ES 2067.75. The gray megaphone of the past couple of days has now spun off an interior megaphone (navy blue on chart) across its VWAP.

The navy blue megaphone could spin off another interior megaphone across VWAP of its own.

This is a classic way of just keeping the price moving sideways. Sometimes the megaphones within megaphones will form a block, sometimes a triangle.

The yen spent months in this kind of megaphone-in-megaphone before collapsing.

The SPY put-call ratio last night was 1.17. That’s very low and bearish, but since we’re not in opex week, the effect doesn’t have to be immediate. And the ratio could get more extreme before we see an effect.

SPY Trying to Break Out of Price Channel

SPY is Trying to Break Out of its 3-Year Price Channel (Red) without a Pullback

SPY is Trying to Break Out of its 3-Year Price Channel (Red) without a Pullback

SPY is in holiday upward drift and trying to break out of its 3-year price channel (red on chart) without a pullback into the channel.

A price that drifts out of a channel this size without a decent pullback does not have far to go.

I expect SPY to drift across the top of its channel and then continue drifting up, clinging to the channel top as it forms some kind of topping pattern.

Because of seasonal bullish factors, I expect that topping formation will be a rising megaphone formation, with everyone talking about how strong the market looks when the wedge enters its final and largest wave up.

Oil Megaphone vs Falling Megaphone Bottom

Oil Megaphone vs Falling Megaphone Scenarios

Oil Megaphone vs Falling Megaphone Scenarios

Oil is megaphoning at the VWAP of its potential bright blue megaphone. If OPEC cuts this week, that little VWAP megaphone will break out upwards and we’ll be in the green scenario.

If OPEC doesn’t cut, the price will plunge again from here and put a falling megaphone formation on the chart.

Either way, oil is bottoming and we’re about to get a nice move in one direction or the other.

ES Back Up Through H&S Neckline Overnight

ES Broke Back Up Through its Navy H&S Neckline Overnight as Expected

ES Broke Back Up Through its Navy H&S Neckline Overnight as Expected

ES has broken back up through its H&S neckline as expected without managing a trip down to the bottom of the red price channel on the chart.

It could still try another wave down from here, but whether it does or not, it’s got very high odds of breaking out through the top of the price channel on its 15-minute chart (red parallel lines) after a partial wave down.

That will break it out of its 3-year price channel as well.

The price could melt up from there, so you’d want to get or stay long on that breakout, but what’s more likely is a manic topping formation, like a rising megaphone with a bottom at the top of the 3-year price channel. A rising megaphone could carry the market sideways-up through the holidays.

SPY 3-Year Price Channel at Critical Decision Point

SPY is at the Critical Decision Point in its 3-Year Price Channel (Pink on Chart) Between Melt-up or Top

SPY is at the Critical Decision Point in its 3-Year Price Channel (Pink on Chart) Between Melt-up or Top

At the October 15 low, SPY reversed at the exact bottom of a potential three-year price channel (pink on chart).

On Friday it confirmed the price channel by reversing at the exact top of the channel.

That means SPY is now at the critical decision point for this price channel.  There are four things it can do here.

The Four Price Channel Scenarios (Red Scenario Most Likely)

It can continue down from Friday’s high all the way to the bottom of the channel to continue moving up the channel.  That would be unusual in a channel this big, so I haven’t even drawn this scenario on the chart.

It can continue down from Friday’s high into the middle of the channel (likely to ES 1937.50/SPY 194.20ish) for a partial wave down, and then break out the channel top into a steeper channel.  This would usually lead to a series of steeper channels and a melt-up.  (Green scenario.)

It can collapse from here through the channel bottom to put in the low before the head of a head and shoulders formation. (Purple scenario.)

Or it can reverse after little or no further retrace to break out through the top of the pink channel (red scenario on chart).

Sometimes a red scenario breakout here would retest the channel top and then move into a series of steeper melt-up channels.  But usually the lack of coiling we’ve seen since the October 15 low would lead to the price crawling up along or across the top of the pink channel, often forming one final rising wedge, before collapsing back into the pink channel and then through its bottom, completing the head of a major head and shoulders pattern.

The Set-Ups

So here are the set-ups.

A Likely Fake Head and Shoulders Set-Up on ES

Normally, I would say here to short on any small topping pattern that breaks out downwards for a trip to at least ES 1937.50/SPY 194.20ish and possibly as far as a breakout through the 3-year pink price channel bottom.  But ES actually broke out downwards through the necklines of a small head and shoulders at Friday’s high, and then a larger head and shoulders on its 5-minute chart.

I’d be telling you right now to go ahead and get short except that ES also formed a falling megaphone (pink on chart below) in the move down from the high.  You don’t see falling megaphones in real head and shoulders patterns.  ES closed on Friday retesting the neckline of that larger H&S.

Friday's Likely Fake-Out Head and Shoulders Put in a Falling Megaphone Heading into Right Shoulder

Friday’s Likely Fake-Out Head and Shoulders Put in a Falling Megaphone Heading into Right Shoulder

That pink falling megaphone strongly suggests that ES will violate the H&S patterns and break out here through the top of the 3-year pink price channel.  That makes the red scenario on the top chart most likely, with an immediate move into a series of melt-up channels possible but a lot less likely than a crawl up the channel top until the move fizzles out.

The confirmation that the red scenario is coming would be a fake breakout past the Friday afternoon low on Sunday night or Monday.  That will suggest a megaphone right shoulder is forming, and a megaphone right shoulder almost always means a higher high is coming.

The Price Channel Breakout Set-Up

That higher high would break the price out of the 3-year pink price channel.  That’s an obligatory set-up to go long if you’re not already long, because there’s a small possibility of a melt-up, and you wouldn’t want to miss that.  But even if the melt-up scenario fizzles as expected, you may make a little money on the crawl up the channel top.

The Crawl Set-Up

If SPY breaks out of its 3-year pink price channel, and then you start seeing the price clinging to or recrossing that channel top, you can forget about the melt-up and just watch for any formation to complete that you can short when it breaks out downwards. The formation will most likely be one final rising wedge or rising megaphone.

If it’s a rising megaphone, on the final wave up everyone will be talking about how strong the market is looking.

The first target for the downward breakout would be roughly the October 15 low, though the move could get messy on the way.

JNK Triangle Legal for Breakout

Junk Triangle (Navy Blue) Breakout would Target Red Megaphone Side

Junk Triangle (Navy Blue) Breakout would Target Red Megaphone Side

JNK has been forming a triangle (navy blue on chart) since spring of 2012.  The triangle formed across VWAP of a megaphone (red on chart) that’s been forming since late 2009.

The navy blue triangle is now legal for a breakout in either direction.

However, a breakout upwards from here would likely be a fake breakout, because the last touch on the triangle bottom was exact.  If the breakout traveled any distance at all it would likely be into the head of a head and shoulders with a neckline at roughly 38.21.

A genuine breakout in either direction would target the side of the red megaphone across whose VWAP the navy blue triangle has formed.

Triangle on the 10-Year

Triangle (Navy Blue) on 10-Year T-Note

Triangle (Navy Blue) on 10-Year T-Note

There’s a legal triangle (navy blue) on the 10-year t-note chart. A downward breakout would target an important long-term megaphone VWAP at roughly 125-10 and possibly lower (there’s a potential head and shoulders on the chart, and this triangle could be the right shoulder).

An upward breakout targets a retest of the October 15 high. Likely a big triangle or other sideways pattern would be forming.

Falling Megaphone on ES 2-Minute Chart

Falling Megaphone on ES with Low an Exact Touch on Megaphone Bottom

Falling Megaphone on ES with Low an Exact Touch on Megaphone Bottom

ES formed a falling megaphone (pink) on this dip. The formation low was an exact touch on the bottom.

The exact touch would usually mean we’re going to see a lower low for this dip.  The falling megaphone means at a minimum a retrace of most of the falling megaphone and most likely a new high after a lower dip low.

This one’s tricky, because yesterday’s high SPY put-call ratio probably accounts for a lot of the falling megaphone buying.