SPY Flat-Bottomed Megaphone Set-Ups (Updated)

SPY is Headed for a Breakout Through the Bottom of its Flat-Bottomed Ascending Top Megaphone (Red) - Fake Breakout of Less Than 5% Would Target New High

SPY is Headed for a Breakout Through the Bottom of its Flat-Bottomed Ascending Top Megaphone (Red)
– Fake Breakout of Less Than 5% Would Target New High

In addition to everything else, SPY has a flat-bottomed ascending-top megaphone on its chart (red).

It’s putting in the usual right shoulder bounce off the megaphone bottom, and at the close on Friday was forming a top on the bounce before a move down through the red megaphone bottom.

The minimum move down is to the retrace target of the orange rising megaphone on the chart, which is at the level of the lowest touch on the bottom of the formation, or roughly 173.83.

That move will take out last Monday’s low, fulfilling last Monday’s NYMO set-up.  When NYMO has a close below -100, as it did last Monday, it almost always follows up with a lower low.  The red flat-bottomed megaphone, which would usually break out downwards, raises already high odds that we’ll see that lower low.

That’s where things get interesting.  The target for a breakout through the red megaphone bottom is the height of the formation subtracted from the bottom, or roughly 149.24.  And there are good reasons to think SPY will be going further, to the bottom of a larger rising megaphone at roughly SPY 125.

But if SPY and ES reenter the flat-bottomed megaphone, turning the downward breakout into a fake breakout, the target is to take out the formation high at 213.78.  Essentially SPY and ES would be putting a megaphone right shoulder on the H&S on the chart, and the new high would become the head of a larger H&S.

I have to say that you usually wouldn’t see a higher high after the downward breakout from the orange rising megaphone.  But a megaphone right shoulder after breakout, though rare, would be one of the few ways to do it.

Update:  I forgot to mention above that if ES and SPY drop 5% or more after breakout through the bottom of the flat-bottomed, ascending-top red megaphone, it cancels the fake breakout set-up.

For example, if SPY breaks out through the red megaphone bottom and drops to 170, it can rally back through the red megaphone bottom without having a target of a new all-time high.  All other things being equal, it would be a coin flip whether the price made it to a new high or just rallied into the body of the formation before dropping to a lower low.

So, once the price has dropped 5% or more after a breakout through the bottom, you have to determine targets some other way because this set-up is closed for new bets.

Yen Price Channel is in Critical Decision Wave at Critical Decision Point for Melt-Up

Yen Futures have Confirmed a Price Channel (Gray) that is Now In Its Critical Decision Wave

Yen Futures have Confirmed a Price Channel (Gray) that is Now In Its Critical Decision Wave

Yen futures have confirmed a price channel that is now in its critical decision wave between starting a bottom and setting up a breakout into a melt-down channel.

This is important because a bottom here would be at the critical decision point for an upwards melt-up within a large bottoming megaphone.

Yen Inverse H&S & Price Channel Set-Ups Could Lead to a Screaming Melt-Up

Yen Inverse H&S & Price Channel Set-Ups Could Lead to a Screaming Melt-Up

Neely Wedge on ES – Danger!

The Neely Extracting  Triangle Leads to Moves Down Past the Formation Low

The Neely Extracting Triangle Leads to Moves Down Past the Formation Low

The Neely extracting triangle is a special type of rising wedge. It represents the end of a move.

Here’s ES:

Neely Extracting Triangle on ES

Neely Extracting Triangle on ES

If you look at it carefully, you can see that the high broke the formation top, and after a downwards breakout from the formation the price has already retested the formation bottom.

This is not a wedge that’s likely to morph into a more conventional rising wedge. It’s a wedge that signifies the move up is over.

The ES extracting triangle is in the right shoulder position of a big H&S on the daily chart. It’s the equivalent of a triangle or rising wedge right shoulder. It says odds are high that the H&S will indeed break out downwards into a big move.

See One Dangerous Triangle for more information on the meaning of a right shoulder triangle and targets.

Trading Notes

I can remember a lot of moves off lows that closed with a NYMO reading below -100 that formed this exact same weird wedge before heading down to a lower low.

Neely even has a name for this type of wedge (which I can’t remember at the moment).

I can also remember a number of H&S right shoulders like this.

Weird Post NYMO -100 Wedge has Typically Lead to at Least Lower Lows

Weird Post NYMO -100 Wedge has Typically Lead to at Least Lower Lows

ES has at least a good chance of going for its lower low when this little top completes, which means through the big H&S neckline.

Combined with Tradegeek’s observation that SPY didn’t make it through its middle Bollinger Band on the monthly chart in 2000 or 2007 after reaching the bottom band, I think you have to take this little top seriously.

But I can’t rule out that the whole thing could still morph into a more conventional rising wedge or, after the lower low, a megaphone right shoulder on the big H&S.

ES Move Off the Overnight Low was Up a Price Channel that has Started a Top

ES Move Off the Overnight Low Formed the Orange Price Channel

ES Move Off the Overnight Low Formed the Orange Price Channel which has Started a Top

The ES move off the overnight low formed a price channel (orange on chart) that just elected to begin a top in its critical decision wave.

The top could be a megaphone as drawn (green scenario) or it could be a small quick triangle that breaks out downwards, or an H&S.

If ES fails to take out yesterday’s high with this top, it’s free to collapse. Literally.  It could go all the way for a breakout through the neckline of the big H&S on the daily chart.

ES could also put in a smaller dip and rally to another new high within a rising wedge, but you can’t count on it.

If the orange channel’s topping process puts in a new high, it’s likely that a bigger megaphone top is forming here, which means there would be a bounce, possibly to another new high, after taking out the overnight low.

Potential Oil Inverse H&S

Oil has Formed a Potential Inverse H&S - If Right Shoulder Starts to Megaphone, a Larger Megaphone Could Be Forming

Oil has Formed a Potential Inverse H&S – If Right Shoulder Starts to Megaphone, a Larger Megaphone Could Be Forming

Oil has formed a potential inverse H&S.  The price action down the blue price channel means it could be the real deal and simply break out upwards to the top of a larger bottoming megaphone, with a target of roughly 70.

But there was an ambiguous downwards breakout from the blue channel (pink channel) that leaves open the possibility that oil will form a megaphone across that inverse H&S neckline before a trip to a lower low, so you’d have to play any breakout a bit slowly.

Oil’s failure to retest the blue channel top before reaching the H&S neckline raises the odds of the purple scenario.

ES Working on Top of Move Out of Monday’s Low (Updated)

ES is Out of Yesterday's Price Channel (Blue) Working on a Top for the Move Out of Monday's Low

ES is Out of Yesterday’s Price Channel (Blue) Working on a Top for the Move Out of Monday’s Low

ES has broken out of yesterday’s price channel (blue on chart) after its critical decision wave up. That means ES has elected to start forming a top rather than set up a breakout into a melt-up channel.

ES has blown every potential strong melt-up set-up it has attempted since Monday.

ES is working on the right shoulder of a giant H&S on its daily chart. The right shoulder tried to be a small triangle (red lines on chart) but broke out of that before completing.  It may have morphed into a rising wedge right shoulder, or it may form a larger triangle or megaphone right shoulder,  or it may simply put in this channel top and then collapse through the H&S neckline.

The H&S on the ES & SPY Charts are Working on a Right Shoulder

The H&S on the ES & SPY Charts are Working on a Right Shoulder

ES has a theoretical minimum retrace requirement of 2080, but Tradegeek has pointed out in comments that once SPY made it to its bottom Bollinger Band at the 2000 and 2007 tops, it never made it back up through its middle Bollinger Band again.

SPY fell to its bottom Bollinger Band on its monthly chart on Monday, and retested the middle band yesterday.

SPY 2000 Top on Monthly Chart

SPY 2000 Top on Monthly Chart

Update: For the price channel top out of Monday’s low, unless we see a symmetrical triangle form and break out downwards, ES is going to make a higher high. By seeing where the dip ends before that higher high, we’ll usually have a better idea of what type of top is forming.

If it’s an H&S or megaphone that’s going to put in a substantially higher high, we’d usually see a small topping pattern at the top of that higher high. A downwards breakout from that is usually a good set-up to short.

Rising Wedge Right Shoulders (Updated)

Often When a Triangle Right Shoulder Breaks Out Upwards without Completing, a Rising Wedge Right Shoulder is Forming

ES Could Be Putting in a Rising Wedge Right Shoulder

Often when a triangle breaks out upwards before completing, a rising wedge is forming (purple on chart).

A rising wedge in the right shoulder position of an H&S has the same meaning as a right shoulder triangle–it means odds are very high that the H&S will actually break out downwards to its target.

Update:  Note that SPY had a similar right shoulder in 2000.

SPY Rising Wedge Right Shoulder in 2000

SPY Rising Wedge Right Shoulder in 2000

I’ve been thinking about this one because it also met megaphone right shoulder requirements without making a higher high.