Trading Note

You know that if they don’t pick off more stops than we just saw that they’ll be coming back for more.  But maybe they want to get more people short first.

ES is forming a small megaphone at the top of its rising wedge of the past few days.

The If I’m Wrong Scenario

If the New Pink Price Channel Holds, Could See a Much Higher High

If the New Pink Price Channel Holds, Could See a Significantly Higher High

This is the last allowed redraw of the pink breakout price channel.

About 5% of the time a megaphone will break out without a retrace to VWAP. You always eventually see the retrace, but it can be postponed for a short time.  For example, an ES topping megaphone at the April 4 high failed to retrace to VWAP before breaking out the bottom.  It didn’t get back to that VWAP until May 13, when it tagged it before another dip.

If this is one of those times, the pink price channel as drawn above should hold and break out the top.

It’s more likely that ES is now heading into the head of a head and shoulders or the middle wave of a megaphone or ending diagonal, and that the topping pattern, when completed, will lead to a trip to 1924. The price could reverse there for a trip to a new high, or not.

NQ Supports the Dip Scenario

NQ Formed a Rising Wedge to Its Megaphone Top

NQ Formed a Rising Wedge to Its Megaphone Top

ES formed a price channel en route to the top of the megaphone that began forming at the recent lows. Now it’s at its megaphone top and the price channel breakout is faltering.

NQ formed a rising wedge to the top of its equivalent megaphone. Note that the megaphone VWAP hasn’t moved up at all through the whole rush to the megaphone top.  Now I’m seeing comments about blow-off tops.  But all big moves in megaphones look like they’re going parabolic.

This is very similar to what Russell futures and IWM did before and during the move to their recent high and megaphone top. At that high, they formed a topping megaphone and then returned to the larger megaphone VWAP. Since that return, IWM has struggled even to return to its topping megaphone VWAP at 117.50.  Will it put in another new high?  I don’t know. Continue reading

ES was in the Exact Same Situation in Early June – Here is What it Did

How This Same Situation Played Out in Early June

How This Same Situation Played Out in Early June

ES was in this exact same situation in early June. In mid-April through mid-May it had formed a price channel. Then it broke out of the channel in a strong move up. But instead of continuing up in a steeper channel, it immediately broke out downwards from the new channel and started forming a rising wedge along the top of the old channel.

It then started to correct in a complicated move involving a megaphone that swung the price to a higher high. After the higher high it collapsed to the bottom of the new megaphone, briefly retested its VWAP, and plunged through the megaphone bottom to the August 8th low.

Reasons I Would Not Be Surprised to See a Short-Term Top Around Here Before a Dip

1. Lee Adler of wallstreetexaminer.com has identified liquidity problems coming up in late August similar to the liquidity problems in late July. The liquidity problems would reportedly ease in September.

2. ES has reached the top of a well-established megaphone it started forming at the recent lows. Usually the price would retrace to that megaphone’s VWAP from roughly around here (the price would usually form a topping pattern first, and the topping pattern would often form across the megaphone top).

3. The price move today looked bullish on a daily chart and kept indicators like NYMO bullish. But the move was up a narrow price channel. When you can move the S&P 500 up a price channel that small, the move is very weak.

4. Usually when moves run out of steam but the market isn’t ready for real selling, it starts forming a megaphone until it triggers some enthusiasm in one direction or the other.

5. At the end of a 2-year+ rising wedge, the final wave up would usually cling more closely to the bottom of the wedge. The market needs a dip to the wedge bottom before continuing to a still higher high.

SPY Put-Call Ratio

The SPY put-call ratio was basically unchanged today.  It rose from 1.51 to 1.58.

But what’s interesting is that, after a 24% drop in open interest, there was a huge rise in open interest today (almost 10%).

So bulls and bears are both putting positions back on again.