No Decision Yet, but Here are the Potential Set-Ups to Short Just in Case

Up Tight Against the Bottom of the Long-Term Rising Wedge and 50 dma, Inside a Rising Wedge

SPY Closed Pressing Up Against the Underside of its 3-Year Rising Wedge

SPY Closed Pressing Up Against the Underside of its 3-Year 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.

ES Rising Wedge in Rising Wedge on Rising Wedge

ES Rising Wedge in Rising Wedge on 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.

The SPY Put-Call Ratio Fell to 1.24 on Friday

The SPY Put-Call Ratio Fell to 1.24 on Friday

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.

Potential Set-Ups to Short

Potential Set-Ups to Short

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.

ES Ending Diagonal vs Head and Shoulders

ES Now has a Potential Ending Diagonal on its Chart as Well as a Potential Head and Shoulders

ES Now has a Potential Ending Diagonal on its Chart as Well as a Potential Head and Shoulders

In addition to topping megaphones within topping megaphones, ES now has a potential rising wedge vs a potential head and shoulders on its chart.  Either formation could break out upwards, which is why you stay long until the market gives an actual set-up to short, but usually we’d see a retrace here to at least the VWAP of the navy blue rising wedge at ES 1854.25/SPY 185.90.

After that retrace, the megaphone formations on the chart would require a bounce to ES 1925.50/SPY 193.  From there it could go either way.

There’s a clear Sornette bubble on the long-term ES chart that has formed since the 2009 low and usually that would require a retrace here to roughly 1350.  But maybe the market wants to extend the topping process before that retrace.

All Put-Call Ratios Lower

The SPY put-call ratio dropped modestly on a small rise in open interest.  Call volume was up slightly, put volume was down slightly.

The CBOE equities  put-call ratio also dropped modestly.  The CPCI had a huge drop from 1.35 to 0.77, well below its 20 dma.

Usually when all three put-call ratios are bullish together, prices move sideways or down.

Legal for Downward Breakout but No Decision Yet

ES is Legal for a Downward Breakout but Hasn't Made a Decision Yet

ES is Legal for a Downward Breakout but Hasn’t Made a Decision Yet

ES and SPY could break down immediately from here but you’d usually see one more wave up (green scenario) even if the breakout is going to be downwards.

The one-more-wave-up scenario would also mean that a downward breakout from the pink megaphone would be a breakout through the blue megaphone VWAP.  That’s a classic set-up with a topping megaphone within a topping megaphone.

The pink megaphone could also break out upwards after a retest of the blue megaphone VWAP–another reason why the green scenario is likely.

Melt-Up vs Correction Set-Up (Updated)

Sky's the Limit vs Correction Set-Up

Sky’s the Limit vs Correction Set-Up

SPY and ES have already started a megaphone top or continuation pattern at their VWAP target. If it breaks out downwards it’s a set-up to short. If it breaks out upwards it’s a set-up to go long again or stay long.

Any serious correction here will retrace to the pink megaphone VWAP at ES 1925.50 before it can turn into a crash. Any melt-up from here to a new high will retrace to ES 1955 before it can turn into a blow-off move.

Update:  Other set-ups to short would include a breakout downwards through ES 1935/SPY 194.  That one would be confirmed  with a break through 1925.50.  Also, if the price has a genuine breakout back into the correction’s falling megaphone, that would be a set-up to start a short.

SPY and ES at Target – Turn Here or Sky’s the Limit

SPY is at its Target - Any Higher and the Sky's the Limit

SPY is at its Target – Any Higher and the Sky’s the Limit

SPY is back at the VWAP of its 4-month red megaphone and retesting the bottom of its 3-year rising wedge (navy blue).

It could nibble a bit at the underside of the wedge (ES has a target a few points higher) or crawl up the underside a bit forming a top across that VWAP. But if it seriously breaks back into the body of the 3-year rising wedge, it’s in the head of a large head and shoulders formation. The initial target would be the top of the red megaphone, but after a retrace to VWAP, ES and SPY would be legal for an upward breakout from all formations on the charts.

A standard megaphone target would be in the SPY 220-230 area/ES 2200-2300. But the price could go into a vertical move that could go well past the standard target.