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.

Put-Call Ratios Neutral

The SPY Put-Call Ratio Fell to Its 20 dma Today

The SPY Put-Call Ratio Fell to Its 20 dma Today

The SPY put-call ratio fell to 2.18 on Thursday. That’s high when compared to the long-term opex Friday norm, but it’s at the ratio’s 20 dma.

The CBOE index put-call ratio fell to 0.96, a little below its 20- and 50 dma, at its 200 dma. The equity put-call ratio fell to 0.64 at its 50 dma, a little below its 20 dma.

Together the ratios are neutral to modestly bullish.

SPY put volume fell by 36% on another strong rise in open interest.  Again, bulls and bears continue to dig in.  Nobody’s backing down.  SPY call volume fell by 31%.

AAPL – Watch Breakout from Potential Bottoming Triangle

AAPL is Forming a Triangle (Blue) at the Bottom of Its Pink Megaphone

AAPL is Forming a Triangle (Blue) at the Bottom of Its Pink Megaphone

On Wednesday, AAPL broke out downwards from a potential topping triangle (purple on chart) that completed a price channel. That should have been extremely bearish, and indeed, the first response was a dramatic price slide.

But AAPL had done something weird before the triangle breakout. It had started forming a megaphone (pink on chart) in the middle of the triangle.

Now AAPL is forming a new triangle (navy blue on chart) across the pink megaphone bottom.

It’s possible that the navy blue megaphone will break out downwards, and if it does, it’s a fresh set-up to short for a move to roughly 82 (to start). Essentially you’d expect AAPL to fall to the bottom of its pink rising megaphone (chart below) and then break out of it a bit to form a bottoming pattern.

The Target for a Downward Breakout Here Would Be the Bottom of the Pink Rising Megaphone

The Target for a Downward Breakout Here Would Be the Bottom of the Pink Rising Megaphone

But usually when you see a triangle form across the bottom of a megaphone (top chart), the triangle breaks out upwards back into the megaphone.  In this case, the next target would be the pink megaphone top at roughly 110, depending on exactly how long it takes to get to that upward-tilting line.

So an upward breakout from the navy blue triangle would be an excellent set-up to get long AAPL again.  A downward breakout would be an excellent set-up to short the stock.

ES End-of-Day Character Change – Bull is Likely Back On

ES Larger Potential Triangle vs Megaphone

ES Larger Potential Triangle vs Megaphone

The market moved up a price channel off today’s low and was looking weak all day despite the short squeeze.  Then near the end of the day the character of the move seemed to change as Fed member Bullard, who’s considered hawkish, suggested delaying the end of QE.

Bullard is the second Fed member in recent days to suggest delaying the end of QE.

Specifically, a likely little late-day head and shoulders looks like it’s going to break out upwards to form a rising megaphone.  That would result in a strong wave up from here.

If we see the move up, it’s possible that a larger triangle (green scenario on chart above) or megaphone (purple, above) may be forming.

But now it’s also possible that an inverse H&S is forming with the head at the low, the left shoulder at the low of the dip on October 13, and the price heading up to the neckline before a right shoulder dip right now (see chart below).

ES Inverse Head and Shoulders Scenario on 5-Minute Chart

ES Inverse Head and Shoulders Scenario on 5-Minute Chart

At this point I’m long again unless I see today’s move complete a topping formation and actually break out downwards from it.  If you prefer to stick to longer-term moves, wait for the potential inverse head and shoulders to complete and actually break out upwards.

If we see the right shoulder of the potential inverse head and shoulders get bogged down forming a megaphone, it’s a tell that the inverse H&S will likely break out downwards.

But if we see a simple, fast right shoulder, and the inverse head and shoulders breaks out upwards, we’re likely in for a rip to a new all-time high.

ES Price Channels on 2-Minute Chart (Updated)

The ES Move Up Today Formed a Price Channel

The ES Move Up Today Formed a Price Channel

I posted earlier that today’s move up had formed a rising wedge, and that after breaking out downwards from the rising wedge ES would likely make some kind of sideways formation, and it could break out upwards or downwards from that.

ES has also formed a price channel (pink on chart) today, though it has already rolled out of the first channel into a possible less-steep channel.

The combination of a rising wedge and price channel suggests that ES is forming a head and shoulders top on today’s move up, but it could also form a larger rising wedge here or a megaphone or a rising megaphone, all short-term topping patterns.

The exact turns on the price channel sides also imply that today’s move up from the low doesn’t have much passion behind it.

The extended top on today’s wave up means ES is likely forming a megaphone here (green scenario on chart).  It could break out in either direction.

By the way, there was a price channel on the move up from yesterday’s low as well.

Update:  ES is now down through the bottom of the less-steep blue price channel.  It’s either going for the neckline level to form the little head and shoulders (green scenario), or it’s going to reverse above that level and go for the purple scenario, which is a rising megaphone top.

The target for that formation would be the blue price channel top and roughly ES 1880, maybe a little higher depending on timing.  That would roughly put into play John’s ema target at SPY 188.22 (see comments).

You wouldn’t normally see this type of a top on a price channeled move, but the put-call ratios were very high yesterday and tomorrow is opex Friday.

ES Downward Breakout from Rising Wedge on 5-Minute Chart

ES Rising Wedge on 5-Minute Chart Broke Out Downwards

ES Rising Wedge on 5-Minute Chart Broke Out Downwards

ES broke out downwards from its pink rising wedge, preserving the possibility that it’s forming a triangle (navy blue on chart).

The rising wedge had the minimum required touches on each side, so the price could move sideways up here, and a sideways formation could still break out upwards.

But the short squeeze from yesterday’s high put-call ratios got sold into, and bulls haven’t shown any conviction yet.