Gold has put in a rising megaphone top (bright blue on chart) to complete its navy blue megaphone and get back to its pink megaphone top.
Gold would usually put in a higher high within the bright blue rising megaphone before breaking out downwards from it.
A breakout from the rising megaphone targets at least the navy blue megaphone VWAP. A trip to the navy blue megaphone VWAP would put an H&S on the chart with a neckline at that VWAP.
Usually that would lead to a breakout downwards through VWAP and a trip to the bottom of the navy and pink megaphones. After that, gold would need to retrace to its navy megaphone VWAP to be legal for a breakout downwards to the bottom of a larger megaphone at roughly 1000.
If gold breaks out through VWAP on that retrace, it should melt up to the pink megaphone top and break out enough to put a topping pattern up there.
Note that a channel breakout downwards, followed by a retrace all the way to the channel top, would likely lead into a falling megaphone.
The yen has everything it needs on its chart for a nice pop to 0.84, a retrace to VWAP, and then a breakout upwards.
If instead it fails as usual, it could do it right here with the orange scenario. That would make its Bollinger Bands really nice and tight.
The bulls can’t stop buying 2000, so instead of a megaphone at the bottom of its potential megaphone right shoulder there’s now a flat-bottomed rising-top megaphone right shoulder on the potential ES H&S.
A fake breakout (purple scenario) would likely mean a squeaker new high that would be the head of a larger H&S that will eventually break out downwards.
The formation is so small that it makes a true upwards breakout from this mess unlikely except for possibly the squeaker new high.
ZN has formed a flat-bottomed rising top megaphone (red on chart). It’s just formed an H&S head on the recent high.
If it can break out through the neckline, the target is the red megaphone bottom, where it would usually bounce into a right shoulder before a breakout downwards.
If the downwards breakout fails to travel 5% before breaking out back upwards through the formation bottom, the target becomes a new high past the formation top. A genuine breakout past the formation top would have a target of the formation height added to the current formation high.
ES is either putting a right shoulder on a double headed H&S (green scenario) or it’s about to break out upwards from it or it’s putting in a megaphone right shoulder (see below) for a squeaker new high before a downwards breakout.
If ES breaks out upwards, it will be from an attempt at a false top within a large topping megaphone (purple in chart below), and its target will be the megaphone top, where it will break out and form a topping pattern that will likely tag 2080.
ES is a favorite to break out downwards from the double-headed H&S, but if it breaks out upwards, most traders would probably feel a lot happier riding out that move long. After a false top, the final move to a megaphone top is usually a melt-up.
Note that a false top could also lead to a retrace to the purple megaphone VWAP before a final surge to the megaphone top (orange scenario in chart above). That scenario is unlikely, however, because of other trading formations on the short-term and long-term charts.
The SPY put-call ratio closed at 1.92 yesterday, well above its 20 dma, but both put and call volume were so low on the holiday that I don’t believe the ratio means the same thing it usually would at that number during opex week. I don’t believe volume that low can wipe out the bearish effect of the steady move down in the ratio late last week, at high volume.
The low-volume holiday trading also mangled a very strong topping set-up on the 5-minute chart.
There’s one other scenario to watch out for–a right shoulder megaphone (blue in chart below).
ES is legal for a breakout downwards to the red megaphone bottom right now. But if instead you see it megaphoning at the blue megaphone bottom, it would usually make one more trip to the top for a squeaker new high before a breakout downwards from this whole topping mess.
I’ve already discussed the flat-bottomed rising-top megaphone (red on chart) on ES and SPY in other posts. This post is to provide more data on how these trading formations play out. All data in this post comes from Bulkowski’s Encyclopedia of Chart Patterns.
First, 2/3 of these formations are reversal formations, meaning they break out the bottom after an upwards price run.
So, even without the NYMO lower low set-up I’ve discussed many times on this blog, ES would be a strong favorite to take out the August 24 low based on this formation.
The technical target for this formation is a little below ES 1500. There is a Neely trend change signal on the chart–if we’re now in a bear market, the percentage of bottom breakouts meeting that target would be 51%. If we’re still really in a bull market, the percentage meeting that target would be 32%.
In a bear market, downward breakouts tend to move fast, with roughly half of downward breakouts reaching their ultimate low in less than two weeks, and 31% reaching their ultimate low within 7 days.
Bulkowski considers a breakout that travels less than 5% a breakout failure. In a bear market, only 8% of downwards breakouts lead to breakout failure. In a bull market, 20% of downward breakouts result in breakout failure.
A breakout failure would target a new all-time high. On SPY, any low after breakout above 172.24 would be a breakout failure.
Downward breakouts travel 10% or more 78% of the time in a bear market, or 54% of the time in a bull market.
Right shoulders (partial pullbacks from the formation bottom before breakout) lead to a breakout through the bottom 74% of the time in a bull market and 79% of the time in a bear market. The average decline after bottom breakout in a formation with a right shoulder is 20%.
Downwards breakouts tend to do best when the breakout level is at the low for the previous year, which it would be in the present case.