Put-Call Ratios All Get Bearish Together

The SPY Put-Call Ratio Moved Up to 2.48 Today

The SPY Put-Call Ratio Moved Up to 2.48 Today

The SPY put-call ratio is up today to 2.48 on a truly massive drop in open interest.  Normally that would be quite high, but the ratio’s 20 dma has been high for so long that it doesn’t look very high on the chart.

SPY put volume was off by 19%.  SPY call volume was off by 36%.

The CPCE pierced its top Bollinger Band (the bands are quite tight right now). And the CPCI (below) got moderately bearish as well.

The CPCI Got Moderately Bearish Today

The CPCI Got Moderately Bearish Today

Usually when all three of these indicators get bearish together, it means an up day for the SPY price will follow. That’s no big surprise, as SPY has a mandatory megaphone retrace and ES has the right shoulder of a potential head and shoulders to put in.

But bears want to see that ES right shoulder top at around 1995, with the SPY wave up topping at the megaphone VWAP at roughly 200.

IWM’s put-call ratio is quite high at 2.72. QQQ’s is neutral.

Corn Price Channel Decision Point

Corn is at the Point in its Price Channel Where it Could Either Consolidate/Bottom or Break Out Downwards into Melt-Down Channel

Corn Price Channel

Corn is at the point in its new price channel (red on chart) that it could break out downwards into a steeper, melt-down channel. This is also a point where it could start consolidating or even form a bottom.

A breakout upwards from the red channel means a consolidation. If the consolidation breaks out upwards, it would be a bottom.

A breakout downwards from the red channel would usually mean that corn is moving into a steeper channel (or series of steeper channels) for a faster move down.

Corn could also just continue to work its way down the existing price channel.

ES & SPY Next Short-Term Move

SPY has a New Megaphone on its Chart (Blue) that Needs a Retrace to VWAP at 200

SPY has a New Megaphone on its Chart (Blue) that Needs a Retrace to VWAP at 200

SPY needs a retrace to the VWAP of its new megaphone (blue) at 200ish. And ES needs a right shoulder on its potential head and shoulders (below) that ought to top at about 1995.

ES Needs a Right Shoulder on Its H&S

ES Needs a Right Shoulder on Its H&S

Basically, if ES starts to megaphone here instead of doing a simpler retrace, it will likely go for an upward breakout from that right shoulder and another new high, with SPY breaking out upwards through its megaphone VWAP for another new high.  But this is a spot where this usually would not happen (for one thing, ES just blew a potential melt-up price channel last night).

The price action suggests that the downward correction should continue to unfold.

ES Working on Right Shoulder of Potential Head and Shoulders (Updated)

ES is Working on Another Right Shoulder

ES is Working on Another Potential H&S Right Shoulder

ES is working on a sort of triple head and shoulders across the VWAP area of its purple and blue megaphones. If the head and shoulders completes and breaks out downwards, ES will likely go to the blue megaphone bottom at 1950-1960 (depending on when it gets there) or SPY 195.50-196.50ish, then retrace to the megaphone VWAP at roughly 1988/SPY199.30. That VWAP retest would be the critical decision point for whether to break out downwards from the megaphone.

A downwards breakout from that megaphone would usually launch a chain of events that would lead into a major correction with some big retraces. I don’t know whether ECB asset purchases will override the usual scenario or not.

Normally you’d see a reversal at the VWAP critical decision point and the market would put in the downward breakout. That’s because the blue megaphone is a topping megaphone within a larger topping megaphone within a still larger megaphone that would almost always retrace to at least VWAP here. The VWAP of the largest megaphone is at SPY 185.42 right now (ES 1849ish).

If SPY and ES get through that VWAP, they’re heading down to the large megaphone bottom, which will likely be in the SPY 167 area (ES 1665), and that would be a very fast wave down. But there would likely be a retrace to SPY 196 first. (See last night’s post for longer-term charts.)

Also, yen futures formed a price channel that has broken out downwards.  The yen is retracing to the top of its new steeper channel.  If it breaks out the top of that channel (navy blue in chart below), it’s at least consolidating here and could be bottoming here.  That should be important for the market.

The Yen is at the Decision Point in its Price Channels Between Melt-Down and Consolidation or Bottom

The Yen is at the Decision Point in its Price Channels Between Melt-Down and Consolidation or Bottom

Update 7:33 a.m. Pacific Time: Another neckline breakout. Now ES and SPY are headed down to the major short-term H&S neckline.

ES Price Channel Cancelled – Sets Up Big Head and Shoulders Scenario (Updated)

ES Cancelled Its Price Channel and is Now a Favorite to Make it to the Blue Megaphone Bottom

ES Cancelled Its Price Channel and is Now a Favorite to Make it to the Blue Megaphone Bottom

ES has cancelled its price channel and is now a favorite to make it to its blue megaphone bottom.  That will likely take it to VWAP of a larger megaphone (red on chart below) as well as the bottom of its 2-year+ rising wedge.

You could short a breakout through the blue megaphone VWAP or the potential SPY short-term head and shoulders neckline.  (Note that there are potential short-term head and shoulder set-ups here for ES that are similar to SPY’s, I’ve left them off the chart for simplicity, but just watch for the right shoulder.)

That would set up the larger potential head and shoulders (purple scenario in chart below).

ES Potential Head and Shoulders Top

ES Potential Head and Shoulders Top

The head and shoulders could break out in either direction.

Update:  Here’s the potential longer-term scenario on SPY.

SPY Longer-Term Megaphone Set-Up

SPY Longer-Term Megaphone Set-Up

IWM Topping Formation Update

IWM and the Death Cross Simulation

IWM is Approaching a Death Cross, but What Does a Death Cross Really Mean?

IWM is Approaching a Death Cross But What Does a Death Cross Really Mean?

Mani points out (thanks!) that IWM is about to have a death cross.  A death cross is when the 50 dma turns under the 200 dma (a golden cross is when the 50 dma crosses up through the 200 dma).

I ran a huge simulation some years back over many years of data looking at what would happen if you never traded anything but death crosses and golden crosses. In other words, you’d get long a trading instrument whenever its 50 dma went up through its 200 dma, and then you’d hold onto it until the 50 dma crossed down through its 200 dma, when you’d switch to short. You’d always be in the market, and you’d use no other stops.

I tested the system with a basket of liquid futures. What I found was that the system had a good return on investment. I can’t remember the exact number, but it was very high, especially for such an easy system. The problem with the system was that you lost money on about 85% of your trades.

The amount of money you’d lose on each of the losing trades was small, but because you’d lose so frequently, you would have some terrible drawdowns—if I remember correctly, the drawdowns were in the 65-70% range. What that means is, if you started with a bankroll of $100k, you could see a drawdown so terrible, all on very small losses, that it left you with only $30-35k by the time your big win came in.

Even worse, you could be in a period of drawdown and despair for something like seven years.  Pretty hard for most traders to take.

The reason the system paid off so well overall despite all those drawdowns was because when it finally did win, it won huge.

What all of that basically tells you is that death crosses and golden crosses are most often a good sign of a trading range rather than a signal of a change in trend.

Having said that, I would agree that it’s likely that IWM is en route to the bottom of its range.  But there might be some megaphoning first, and that could hurt you if you short right here and now.

The IWM Topping Megaphones

IWM's Topping Megaphone has Spawned Two Important Interior Megaphones

IWM’s Topping Megaphone (Blue) has Spawned Two Important Interior Megaphones Across VWAP

IWM started forming a megaphone (blue on chart) at the end of November 2013.  Then in April 2014 it started crossing and recrossing VWAP of that larger blue megaphone, forming an interior megaphone (pink on chart) that is probably a continuation pattern (by my personal rules), even though it’s big and even though it put in a new high.

Both the blue and pink megaphone are incomplete in terms of normal megaphone rules (or at least my own normal megaphone rules).  The blue megaphone would usually (roughly 3/4 of the time in this situation) put in another wave down to its bottom before retracing to VWAP to make a decision on which way to break out. So would the pink megaphone.

The wave down to the bottom of the blue megaphone would usually not make it all the way to the bottom as drawn (the bottom on the chart right now is a guideline) but it would go significantly lower than the Feb. and May 2014 lows.

Same for the pink interior megaphone.  It would usually take out its previous low but not make it all the way to the guideline bottom.

To make things even more complicated, the pink megaphone has spun off its own interior megaphone across VWAP (orange on chart).  This megaphone has a lot of work to do to complete, and it too may have started spinning an interior megaphone across VWAP.

Yen futures did the same thing from early December 2013 until they broke out downwards in August from what looks like a triangle on the yen December futures chart.  (It looked a lot more chaotic on earlier futures charts.)

In the end the overall look of the IWM sideways move will be some kind of triangle or head and shoulders or triple top which, when it breaks out, will be headed for that blue megaphone bottom.

But short-term, the question is how does it get there.  The daily chart above of the blue megaphone shows a likely route.  Shorter-term, the scenarios below would be typical.

IWM Short-Term Megaphone Scenarios

IWM Short-Term Megaphone Scenarios

That chart looks almost tradeable, but in order to make it readable, I had to leave out a lot of likely interior waves. For example, a topping megaphone may be forming inside that red megaphone, and it may require a retrace to that megaphone’s VWAP at roughly 115 before it can break out downwards to take the price lower.  It may even make a retrace to the 116.75 area at the red megaphone top before it can head down to the red megaphone bottom.

There’s likely still some pretty tough trading ahead for IWM.

SPY Put-Call Ratio Rises on Collapse in Call Volume

The SPY Put-Call Ratio Returned to its 20 DMA Friday on a Collapse in Call Volume

The SPY Put-Call Ratio Returned to its 20 DMA Friday on a Collapse in Call Volume

The SPY put-call ratio soared from its bottom Bollinger Band back to its 20 dma on Friday on a collapse in call volume.

SPY put volume rose by 8% on a small drop in open interest.  SPY call volume fell by 64%.

Meanwhile, the CPCI got modestly bullish on Friday.

The CPCI Got Modestly Bullish on Friday

The CPCI Got Modestly Bullish on Friday

ES Closed on Price Channel Retest

ES Closed on Retest of Price Channel Bottom

ES Closed on Retest of Price Channel Bottom

SPY has already blown its potential price channel, but ES closed on a retest of the bottom of its potential price channel.

It has to survive Sunday night, and even if it does the next wave up could be part of a topping process that began today.  Still, I’m staying long until I have an actual set-up to short.

So right now it’s a contest between the potential SPY head and shoulders and ES wild megaphone, with a small possibility of liftoff into a melt-up.