ES End of Day Price Channel

ES Formed a Price Channel the Last Few Hours of the Day

ES Formed a Price Channel (Red) the Last Few Hours of the Day

ES formed a price channel the last few hours of the day (red on chart).

The channel is at the point where it has enough alternating touches on its sides that it has to put in some kind of topping or continuation pattern.

The pattern could be a triangle that breaks out of the channel, or a megaphone or head and shoulders, or a rising wedge inside the channel.

A breakout from this channel is not enough for most people to short, but it could lead to a solid set-up in either direction.

ES Breaks Out Through 200 dma but in Rising Wedge

The SPX Closed on a Kiss of its 200 dma

The SPX Closed on a Kiss of its 200 dma

The SPX closed on a kiss of its 200 dma. ES closed with a breakout through its 200 dma, within a rising wedge.

ES Closed on a Breakout Upwards Through its 200 dma

ES Closed on a Breakout Upwards Through its 200 dma

ES Rising Wedge

But the ES Breakout was in a Rising Wedge

When a price breaks an important line in the context of forming a triangle or megaphone or rising wedge, it doesn’t mean what it usually would mean.

The move up is weaker than it looks.  SPY could not maintain this morning’s price channel.  That doesn’t mean it’s time to short.

There’s nothing to do now but let ES complete its rising wedge.  That should take it to at least the 50% retrace of the move down from the high and to roughly a retest of the underside of its 3-year rising wedge.

We’ll see how it handles all of that.

ES Rising Wedge is in Control (Updated)

ES Rising Wedge (Navy Blue) is Confirmed

ES Rising Wedge (Navy Blue) is Confirmed

There was no surge of buying or selling into buying on the breakout from the inverse head and shoulders on the ES chart, but ES keeps chugging up its navy blue rising wedge, which is now confirmed.

At this point it’s hard to believe it won’t reach its 4-month megaphone VWAP at 1955. The market could go higher if the rising wedge breaks out upwards, or if ES moves sideways after a downwards breakout from the wedge and then breaks out upwards from that consolidation.

At this point you just stay long until there’s an actual set-up to short, possibly at or across 1955.

Update:  If ES starts megaphoning across its inverse H&S neckline (red on chart), and puts in a lower right shoulder after having broken out, that’s a signal that it could be going wrong.

Note that SPY has Bounced Off its Potential Price Channel Bottom for Now

SPY Bounces Off Potential Price Channel Bottom for Now

SPY Bounces Off Potential Price Channel Bottom for Now

If it takes off fast for the channel top, it’s bullish. If it crawls up the channel bottom, it’s probably going to break out downwards through the bottom.

If it breaks out through the channel bottom, it’s bearish unless it makes a new high first. A new high first would imply that there’s a higher high to come after a dip.

This is based on old-timer price channel rules.

ES Potential Price Channel is Key to Lower Low vs. Melt-Up

The Way ES Acts Around Its Potential Larger Rising Wedge and Price Channel are Key to the Next Big Move

The Way ES Acts Around Its Potential Larger Rising Wedge and Price Channel are Key to the Next Big Move

ES completed its rising wedge (purple on chart) at the open last night and has broken out downwards from the wedge overnight. The wedge put in the minimum required number of touches on each side, and would now usually put in a sideways move, like a head and shoulders or megaphone, before a further correction.

It’s not absolutely required to put in the sideways move before a drop, however.

If it does put in the sideways move, it will likely turn right here to put in a still larger rising wedge as part of it (green scenario on chart).

If ES doesn’t reverse here, the next important spot is the bottom of its potential price channel (dark blue on chart). If it can reverse there and put in a new high, it could be setting up a melt-up, depending on whether the new high makes it to the channel top.

If ES breaks out of the potential channel before putting in a new high, either a larger inverse head and shoulders is forming, or the market just completed a connecting wave before the next phase of a crash.

Weekend SPY Puzzler – Possible Failed Inverse Head and Shoulders in the Works

The SPY Put-Call Ratio Closed on Friday at 1.68, Well Below its 20 dma

The SPY Put-Call Ratio Closed on Friday at 1.67, Well Below its 20 dma

The SPY put-call ratio closed at 1.67 on Friday, well below its 20 dma. So traders like you and me and everyone else reading this are apparently feeling confident that the bottom is in.

Yet SPY put volume fell by only 6% today on another strong rise in open interest. That means both bulls and bears dug in some more, with nobody backing down. The ratio dropped because of a 22% increase in SPY call volume.

Meanwhile, the big stacks pushed the CBOE index put-call ratio up through its top Bollinger Band to 1.70. What has them so scared?

The CPCI Soared to 1.70 Today, Up Through Its Top Bollinger Band

The CPCI Soared to 1.70 Today, Up Through Its Top Bollinger Band

The last time the CPCI was this high was on May 30, 2013, as the dip to the June 24 low was getting going.  Recent dates when the CPCI has broken its top Bollinger Band while the SPY put-call ratio fell a comparable amount to today were July 24, 2014, August 29, 2014, and September 30, 2014.

The soaring CPCI occurred on a day when SPY established a new price channel that would usually put in at least one more wave up before starting a sideways move, and could climb up the channel a long way, or even break out into a steeper channel on the next wave up for a melt-up.

SPY has Established and Retested a New Price Channel

SPY has Established and Retested a New Price Channel

And ES has drawn another potential rising wedge (navy blue on chart below) that would require at least another wave up and then likely some kind of sideways move that would probably climb higher still (green scenario on chart). But the CPCI suggests that something different is about to happen (such as the purple scenario on chart).

ES Potential Rising Wedge vs Potential Head and Shoulders

ES Potential Rising Wedge vs Potential Head and Shoulders

What this means to me is that we should take any downward breakout from the new SPY price channel or ES potential rising wedge very seriously.  It would be a set-up to exit longs and return to short.  It would likely mean a failed right shoulder and downward breakout from the inverse head and shoulders patterns on both charts, and those usually make for strong moves.

Failed bottoming patterns are characteristic of melt-downs.

ES Overnight Megaphone (Updated 2x)

ES Overnight Megaphone

ES Overnight Megaphone

Here’s an ES overnight megaphone to keep your eye on. John’s target (see yesterday’s comments) of SPY 5 dma a little over 188 looks possible.

This megaphone is too low, small and tight to be a right shoulder megaphone on the potential inverse H&S on the chart.

A run to the megaphone top followed by a retrace to VWAP would put a right shoulder on the potential inverse H&S.  A downward breakout makes a triangle more likely here.

Update 7:30 a.m. Pacific Time:  ES has reached the navy blue megaphone top but is a little below the potential inverse H&S neckline.

It could break out of the navy megaphone to form a topping pattern that reaches the neckline or higher before retracing to at least VWAP, or it could crawl up the megaphone top to get up to the neckline, or it could reverse here and return to near the recent lows to form a triangle.

Update 2: 9:30 a.m. Pacific Time:  Okay, now ES is up at the inverse H&S neckline.  Now we see if it starts a right shoulder megaphone, which would imply a lower low is coming (probably 1800), or whether we get a short, fast right shoulder, which means an upward breakout to at least ES 1955/SPY 196 is coming.

ES is Back Inside 4-Month Megaphone, at Inverse Head and Shoulders Neckline

ES is Back Inside its 4-Month Megaphone (Red) & Retested Its Bottom Yesterday

ES is Back Inside its 4-Month Megaphone (Red) & Retested Its Bottom Yesterday

ES is up 25 points overnight, as expected from its late-day character change yesterday.

It’s also near its potential inverse head and shoulders neckline (gray on chart) or potential triangle top (light blue bottom on chart) or megaphone top (would need to go a bit higher).

Potential Inverse Head and Shoulders, Triangle or Megaphone

Potential Inverse Head and Shoulders, Triangle or Megaphone

That would put a bottoming formation across the bottom of the 4-month red megaphone. Assuming it breaks out upwards, the minimum target would be the megaphone VWAP at ES 1955/SPY 196. If the price gets through the VWAP area, the target becomes the red megaphone top, and it would usually break out up there to form a topping formation on top of the megaphone. Depending on how long the price takes to get up there, the market could go as high as 2100 before another retrace to the megaphone VWAP.

Then the market would be free to break out upwards from all its recent trading formations and go into a vertical move.

Or it could set up for the correction it has likely just put off on new Fed talk about postponing the end of QE.