Up Tight Against the Bottom of the Long-Term Rising Wedge and 50 dma, Inside a Rising Wedge
The SPX closed at its 50 dma. No decision.
SPY closed pressing up against the underside of its 3-year rising wedge (navy blue on chart) and just below its 50 dma. No decision.
ES got to this point crawling up the bottom of a rising wedge within another rising wedge at the top of yet another rising wedge.
Everyone’s Bullish, Yet Every Melt-Up Set-Up has been Blown
What’s also on my mind is that in the course of forming those rising wedges, ES has blown two strong opportunities to set up a melt-up to an obvious target at its 4.5-month megaphone top at roughly 2050. First, on Wednesday it cancelled an upward breakout from its navy blue rising wedge by rolling over back into the wedge. Second, a little later on Wednesday it cancelled a potential price channel melt-up set-up.
And it continues to bother me that all of the put-call ratios are low. The CBOE index put-call ratio is up a bit today but still well below its 20 dma. It’s the same with the equities put-call ratio.
And the SPY put-call ratio dropped sharply to 1.24, well below its 20 dma and getting close to its bottom Bollinger Band.
That drop happened on another moderate rise in open interest as SPY put volume dropped by 10% and SPY call volume rose by 21%. I would think those new calls would have to be a tempting target.
Could Just Continue Up But Here are the Set-Ups in Case it Doesn’t
So there’s reason to be bearish but for the moment it doesn’t matter. The play is to stay long until we have a set-up that actually completes and breaks out downwards. So far the move out of the mid-October low has been characterized by repeated attempts at tops that either failed to complete or broke out upwards.
We have to respect that this move could just keep running straight up.
Having said that, here are set-ups that I will short if I see them next week.
1. I would start a short position on a downwards breakout from a head and shoulders or other topping formation perched on top of the bright blue megaphone on the chart. That megaphone is now the perfect size for a retrace to the navy blue rising wedge VWAP.
2. I would add to that short position (or start one if I missed the earlier set-up) on a breakout downwards from the bright blue rising wedge.
3. I would add more to a short position on a breakdown through the VWAP of the bright blue megaphone at roughly 1936.50.
The target would be the VWAP of the navy blue rising wedge at roughly 1850. Then we’d see where the bounce off that level takes us. The minimum retrace would be to the bright blue megaphone VWAP at 1936.50.
If the early short set-ups are going to fail, it will be in the right shoulder of the potential head and shoulders on the chart (potential neckline at roughly 1936.50).
If that right shoulder starts to form a megaphone, or consolidates briefly in the area where it should top and then breaks out upwards, forget about short and just get long again for a melt-up.