SPY Interior Megaphone Set-Up for Probable Final Surge (Updated)

SPY Interior Megaphone (Orange) Set-Up

SPY Interior Megaphone (Orange) Set-Up

SPY has formed a new interior megaphone (orange) within its 3-month (purple) megaphone. It should be a bottoming pattern for the last wave down from the megaphone top.

The orange megaphone would usually take the price to the bottom of the purple megaphone before reversing for a breakout upwards to at least the blue megaphone VWAP at roughly 183.50. The price could also go all the way to the top of the purple megaphone. The price could even break out the top of the purple megaphone after a dip back to the purple megaphone VWAP, wherever it is at that time.

Update: The orange megaphone VWAP has moved up to roughly 178.75 since I posted this.

The Future Gets Clearer

SPY Inverse Head & Shoulders Bottom for Megaphone Wave

SPY Inverse Head & Shoulders Bottom for Megaphone Wave

SPY looks like it’s going to complete its trip to its 3-month megaphone bottom (purple on chart) before retesting at least its blue megaphone VWAP, and possibly heading up to the megaphone top for a breakout.

SPY will most likely complete the trip to the megaphone bottom with an inverse head & shoulders, as in the chart above, or with an interior megaphone  (see chart below).

SPY Interior Megaphone to Purple Megaphone Bottom

SPY Interior Megaphone to Purple Megaphone Bottom

ES seems to be forming an interior megaphone (orange) across its 3-month megaphone VWAP. The differences between the SPY & ES charts make the green scenario in the ES chart below the most likely one.

Most Likely ES Megaphone Scenario

Most Likely ES Megaphone Scenario that would Satisfy SPY Requirements as Well

Essentially, ES would be putting in a final partial wave down within its navy blue megaphone, which means you’d expect to see ES break out the top of its navy blue megaphone. I’ve left out several probable interior megaphones and retraces for simplicity.

If instead ES reverses at its orange megaphone VWAP on its next wave up from the megaphone bottom, everything changes. I’ll post about that if it happens.

 

ES & SPY Pre-FOMC

ES Looks Like It Wants to Retest Its Blue Megaphone VWAP

ES Looks Like It Wants to Retest Its Blue Megaphone VWAP

The SPY and ES charts have important differences, but together they suggest that we’re about to see a rally to the SPY 183.50 area (middle Bollinger Band) before the price continues to the SPY & ES 3-month megaphone bottoms (navy on ES chart above, purple on SPY chart below).

ES looks like it’s forming a small inverse head and shoulders with a neckline at roughly its blue January megaphone bottom. ES and SPY still need a retest of that blue megaphone VWAP before they can proceed much further down, and this would be a classic way to start the trip.

It would also be typical in the final wave of a megaphone (in this case, the larger 3-month megaphone) for a false bottom to form at roughly the area of the previous megaphone low. The January 27th low is in the right area for a false bottom for both SPY and ES. After a false bottom of this type, there is usually a retrace to the megaphone VWAP (which is in roughly the same place as the blue megaphone VWAP), where the price reverses for the trip the rest of the way to the megaphone bottom (lavender scenario on chart below).

SPY Wants to Retest Blue Megaphone VWAP

SPY Wants to Retest Blue Megaphone VWAP

However, if the price reverses at the blue megaphone bottom and then puts in a lower low, the light blue bottoming megaphone scenario on the above SPY chart is probably in effect. It’s just a more complicated way of meeting all the megaphone and interior megaphone requirements, which ultimately reflect market makers taking profits out of a confused sideways market.

And if we see a new interior megaphone form across the blue megaphone VWAP area (green scenario on SPY chart), and it breaks out upwards, you redraw the bottom of the purple (SPY) megaphone (gray line in SPY chart above) and assume a target of a breakout through the 3-month megaphone tops. (It would be legal on ES in terms of standard megaphone requirements, but barely.)

The green SPY scenario would also represent a failed right shoulder on an H&S, and the move up out of that would be explosive.

Remember, Sornette bubble formations are characterized by topping formations that break out upward.

Gold Significant Bottom Forming

Gold is Forming a Bottoming Megaphone

Gold is Forming a Bottoming Megaphone

Gold has a long-term target of roughly 1000 for the correction since the 2011 high, but it’s getting bought sufficiently at this point that the only way it can get down there is with a bottoming megaphone (red on chart above).

Right now gold is working its way to the top of the red megaphone. The way up may get complicated by a possible interior megaphone (navy blue on chart), but after reaching the top gold is almost certain to reverse for a plunge to the megaphone bottom, which should take it to the 1000 target.

Gold will probably form some kind of bottoming formation at the red megaphone bottom. It then becomes a buy to at least 1400 and possibly much higher.

 

SPY & ES Continue to Work Their Way to Their Megaphone Bottoms

SPY and ES continue to work their way to their 3-month megaphone bottoms (purple on SPY charts below).

SPY bounced off the bottom of its interior silver megaphone today, then turned down at the closest megaphone VWAP.

SPY Bounced Off Its Silver Megaphone Bottom Today, Then Turned at Closest 3-Month Megaphone VWAP

SPY Bounced Off Its Silver Megaphone Bottom Today, Then Turned at Closest 3-Month Megaphone VWAP

SPY has lots of mandatory retests above, but with the bottom of the purple megaphone so close, it would usually go there first, and be aware that the price could go through the megaphone bottom, just not very far through. If it goes through, you should see it start forming some kind of bottoming pattern very shortly after. The bottoming pattern could be an inverse H&S with a neckline at the purple megaphone bottom, or it could be a megaphone that crosses and recrosses the purple megaphone bottom. It could also form a diamond or triangle that crosses and recrosses the purple megaphone bottom.

Alternatively, SPY could put in an inverse H&S here in which the head barely tags the purple megaphone bottom.

SPY Could Complete Wave to Purple Megaphone Bottom with an Inverse H&S

SPY Could Complete Wave to Purple Megaphone Bottom with an Inverse H&S

Or SPY could work its way to the purple megaphone bottom with an interior megaphone.

spy-meg-1-27-2014

SPY Could Work Its Way to Purple Megaphone Bottom with an Interior Megaphone

I like that interior megaphone scenario because it would eat more time and provide a better chance of SPY tagging the 200 dma on its daily chart. It would also provide for mandatory VWAP retests above.

The interior megaphone would also set up a possible fake H&S on the chart, complete with a potential fake breakout. An upward breakout from a failed right shoulder would provide the kind of power needed for a melt-up into the head of the larger H&S formation that you’d expect to see to complete this part (part 2) of the three-part Sornette bubble formation that’s been forming since the 2009 low.

Heading to SPY 176-176.50 After Donchian/Turtle Short Signal

SPY is Headed for Its Purple Megaphone Bottom Before Move Up to at Least VWAP

SPY is Headed for Its Purple Megaphone Bottom Before Move Up to at Least VWAP

Okay, SPY broke out downwards through its blue megaphone bottom and downwards through all of its purple megaphone VWAPs.

That means we now know that SPY is headed all the way to its silver and purple megaphone bottoms at roughly 176-176.50 (depending on when it gets there). This means SPY is likely building a significant top, but that we have probably not yet seen the high before the big correction.

There are some mandatory retraces on the chart coming up. First, SPY must retest its blue megaphone VWAP at roughly 183.65. It can reverse hard before going much lower and go straight up to it before completing the move to the purple megaphone bottom, or it can finish the trip to the purple megaphone bottom and then return to 183.65.

If SPY returns to the 183.65 blue megaphone VWAP before reaching the purple megaphone bottom, it will still need at least a retrace to the purple megaphone VWAP after reaching the purple megaphone bottom. Right now that VWAP is at roughly 181, though that level may change if SPY spends a lot of time near the purple megaphone bottom.

SPY can then reverse at the purple megaphone VWAP and crash down out of the purple megaphone bottom (purple or green scenarios on chart above). But it’s more likely that SPY will return to the purple megaphone top. Then it will either break out of the purple megaphone top, form a topping formation along the top, and reverse hard, or it will return to VWAP after reaching the top and reverse there for a major breakout through the purple megaphone top (pink and orange scenarios on the chart).

SPY Donchian/Turtle Short Signal

SPY broke out downward from its 20-day price channel Friday (dark green on chart below) when it got pushed down through roughly 181.20. That triggered selling from a lot of Donchian and Turtle-type system traders. That selling was what pushed SPY through its purple megaphone VWAP.

SPY Broke Out Downward from Its 20-Day Price Channel Friday (Dark Green)

SPY Broke Out Downward from Its 20-Day Price Channel Friday (Dark Green)

You see a lot of these Donchian/Turtle 20-day price channel downward breakouts in the dip before the head of head and shoulders formations. (If you back test this type of signal, you’ll find it only pays off roughly 1/3 of the time, but is still profitable because the size of the payoffs is so large relative to the losses when you get stopped out.)

After one of these signals you generally see some follow-up selling from system traders who only check their charts at the end of the day. Then the market tends to move up again to eat these traders’ stops. That buying tends to propel the market through other critical stops, and much of the trip into the head of the H&S is essentially a short squeeze. Once the market breaks out past the old high, it triggers buying from these same system traders and more stop eating from shorts who placed stops a little beyond the old high.

On a long-term chart, it may look something like this:

SPY Topping Scenario on Long-Term Chart

SPY Topping Scenario on Long-Term Chart

ES Suggests an Overnight Swoon

The ES megaphones require a much deeper drop than the SPY megaphones require, suggesting a significant overnight swoon coming up that you may wish to take advantage of if you trade futures.

ES Megaphones Require a Much Deeper Swoon Than SPY Megaphones

ES Megaphones Require a Much Deeper Swoon Than SPY Megaphones

Watch Out for Interior Megaphones at Megaphone VWAP Areas

The reason the megaphone and interior megaphones on the above charts have been forming is that sophisticated traders are using every opportunity to sell off large positions without driving down the price too much. That means we’re likely to continue seeing interior megaphones form around megaphone VWAP areas and tops and bottoms. We will also see interior megaphones spawning their own interior megaphones.

It’s generally a good idea to avoid over-trading the middle of a megaphone. If you got out of long positions on the breakdown from the small orange interior megaphone the other day, just stay out until the price reaches the purple and silver megaphone bottoms. Try to reenter your long position on another breakout of some kind, such as an upward breakout from a bottoming formation down there.

If you’re still holding long-term long positions, I’d ride out this drop until at least a retest of the purple megaphone VWAP, wherever that turns out to be at that time. Depending on what happens there, I’d ride out longs to the purple megaphone top, and watch the action there.

Signal to Just Jump Ship

A genuine breakout downward through the trend line from November 15, 2012 to today (navy blue on middle chart above) would be a warning to just jump ship. But be careful, because we’re likely to see a small fake breakout through that trend line on this dip.

A sign of a fake breakout would be a surge in volume on a break of that line without a large move in price, followed by a recrossing of the trend line upward and no follow-up selling past the original breakout low.

SPY January Megaphone Downward Breakout

SPY Has Broken Out of Its January (Blue) Megaphone

SPY Has Broken Out of Its January (Blue) Megaphone

SPY has broken out downwards from its January (blue on chart) megaphone after breaking out downwards from its shorter-term megaphone yesterday.

Because the last wave to the bottom of the blue megaphone came all the way from the top of the formation, SPY would usually retest the blue megaphone VWAP area before continuing much further down. However, it could creep or zigzag down to the purple 3-month megaphone VWAP area at roughly 179.36 first.

If SPY reverses at the blue megaphone VWAP (green scenario on chart), the next target will be a small breakout through the bottom of both the purple and silver megaphones on the chart before retracing to at least VWAP of the purple megaphone, which should be roughly in the middle of the formation by that time.

SPY could also make it through the blue megaphone VWAP for another run to the blue megaphone top (orange scenario on chart), but that is a less likely scenario.

All of these moves will likely be comprised of a lot more zigzags and interior megaphones than I have shown on the chart.

There are good odds of an excellent set-up near the silver and purple megaphone bottoms for a final surge into the head of a topping formation, and soon after that, a set-up for a big short. Just be aware that the orange scenario on the chart above would lower the odds of the “final surge” scenario.

 

SPY Megaphone Update (Updated)

SPY 3-Month Megaphone & Interior Megaphones

SPY 3-Month Megaphone & Interior Megaphones

The SPY shortest-term megaphone (orange) broke out downward today.

If SPY forms a bottoming pattern across or at the orange megaphone bottom, and then breaks out upward from that formation back into the orange megaphone, recrossing the blue megaphone VWAP, the orange megaphone was a bottoming pattern for the final wave down of the blue megaphone.

That would be bullish, with a target of a pierce through the top of the purple megaphone and a possible vertical move to follow.

Otherwise, SPY must now work its way to the bottom of the next largest (blue) megaphone, which is what I think will probably happen. My favorite scenario for doing that is the light blue scenario on the chart above, which would take SPY to the lowest of three VWAPs in its 3-month (purple) megaphone.

SPY will either 1.) reverse at that VWAP for a breakout through the top of the purple megaphone and beyond, or 2.) break through VWAP to complete the trip to the bottom of the purple megaphone. If we see the trip to the bottom of the purple megaphone take place, SPY must retrace to at least VWAP once again, wherever that is at that time. (Right now there are three roughly equal VWAP areas, but the bottom one will probably take charge now.)

That retrace to VWAP for scenario 2 would put a possible head and shoulders formation on the chart (green scenario). Even if SPY is forming a major top here, as seems highly likely, the right shoulder of that H&S will probably break out upwards in a melt-up (orange scenario) to the top of the purple megaphone before another retrace to VWAP or the megaphone bottom.

The Fed is still buying a lot of assets into a smaller supply, so traders have time to get out and that probably means we get one final melt-up coming up into the head of a topping formation.

Update: To show the overall outline of the possible major moves within these megaphones, I’ve eliminated a lot of likely smaller megaphones and retraces. But be aware that the sideways move we’re stuck in will be messy.

However, we should see a clear and strong set-up for betting the probable final surge, as well as a strong set-up for a major short down the line.