In Case Things Get Crashy Overnight

Just in case the nested head and shoulders crash scenario gets underway overnight on the government shutdown news, I’m leaving an order to short a little below a breakout downward through the megaphone VWAP and the bottom of the rising wedge on the SPY and E-mini daily charts.

I’ve also raised my stop on my long position. But I’m not closing out that position unless it gets stopped out. For all we know, the market may surge on the thought that the Fed will further postpone any taper.

The market is still well-protected with puts—the SPY put-call ratio hasn’t budged from last Friday’s high number.

Raising Stop on Long Position with House Saying No More Votes Tonight

Setting Stop on Potential Price Channel

Setting Stop on Potential Price Channel

So, the House announced there would be no more attempts at a vote tonight, and the market pulled back a little on its after-hours ramp.

The price had moved up from the falling wedge breakout to almost the falling wedge target (the highest touch on the top of the wedge).

I have a starter long position on based on the falling wedge breakout and I’m not in the mood to blow a lot of money on this trade in case things go very bad tonight.

So I’m moving up my stop to the bottom of the potential price channel (orange lines), which would get me out of the trade with a small profit. Waves at this point in a megaphone tend to either move very fast at the start, with small retraces, or move within a price channel near the start. I’ll keep moving that stop up along the bottom of that price channel as long as I’m awake.

This move up, if it’s going to continue, could also form a short-term bubble wave. A bubble wave would have a deeper retrace before moving up again and breaking out past this evening’s high, but by the time it’s breaking out I’ll be awake again and can bet it.

E-mini and SPY Breakouts (Updated)

E-mini Ending Diagonal Breakout Plus Megaphone Reentry

E-mini Ending Diagonal Breakout Plus Megaphone Reentry

The E-mini has broken out of an ending diagonal. That’s a set-up for a starter long position, even though the price could still move sideways for a while, as in the chart above.

The E-mini has also reentered its megaphone formation. That’s worth adding a bit to a long position.

SPY has broken out of a price channel (price channels are silver then purple on the chart below) and looks about to break out of an odd but legal ending diagonal (bright blue lines). SPY, like the E-mini, has reentered its megaphone.

SPY Price Channel Breakout

SPY Price Channel Breakout and Megaphone Reentry

That’s plenty to start a long position in SPY. You could add on a breakout through the top of the ending diagonal.

SPY will probably form an inverse H&S (it usually would after the way it moved down the price channels), and a breakout from that would be a good place to add the rest of your position.

SPX targets are in the upper 1800s. There are a lot of megaphones on the charts to break out of, with their mandatory retests of the megaphone VWAP, so the going will probably be rocky for a while.

Update: If you’re a conservative trader, or you’re trading something like a 401k in which you’re limited to small number of trades in a period, you could wait to go long on an upward breakout from the rising wedge on the SPY daily chart. If you like to gamble it up and can get out if you need to, you’ve got an edge going long right here.

A Spectacular Long-Term Buy or Short Coming Up on SPY

SPY Seems to be Forming an Ending Diagonal Heading into its Megaphone VWAP (Orange Horizontal Line)

SPY Seems to be Forming an Ending Diagonal Heading into its Megaphone VWAP (Orange Horizontal Line)

I believe SPY is going to reach its megaphone VWAP (orange horizontal line) by way of an ending diagonal formation (navy blue lines), and that the ending diagonal will break out upwards. (If there’s not enough selling to get the price down to the target, an inverse head and shoulders will form and you buy the breakout from that.)

I believe that breakout will be a spectacular buy, with the price ultimately breaking out upward from the SPY rising wedge on the daily chart. The target of the rising wedge is roughly 1890, and the bubble formation targets that area as well. Here is the rising wedge on the daily chart (silver lines):

SPY Rising Wedge

SPY Rising Wedge (Silver Lines)

But, if the price should break out downwards from that rising wedge, it would also be breaking out downward through its megaphone VWAP, and I would definitely short there for the bear doom nested head and shoulders scenario.