SPY Put-Call Ratio Falls While CPCI Soars

SPY Put-Call Ratio Falls Almost to 20 dma

SPY Put-Call Ratio Falls Almost to 20 dma

The SPY put-call ratio fell today almost to its 20 dma, and so did the CPCE.  The CPCE fell from a spike through its top Bollinger Band on Monday.

But the CPCI spiked from its lower Bollinger Band up through the upper band today. This is surprising heading into the first day of the new quarter.

The CPCI Spiked Today

Meanwhile, the CPCI Spiked from its Lower Bollinger Band Through its Upper Band

SPY put volume rose by 7% today on a big rise in open interest. SPY call volume rose by 47%.

Together, the ratios are bearish. The only question is whether the bearishness gets blown in one swoon to the bottom of the SPY 2-year+ rising wedge (possibly as the head of an inverse head and shoulders) or whether the selling is sustained and disciplined enough to complete the ES triangle and then break down. That would be a must-short for a potential drop to 1850 or a bit below, and would be another step in setting up a potential major top.

You often see these CPCI surges a little early before the right shoulder of an important head and shoulders turns.  The potential triangle on the ES chart is in the right shoulder position of a potential head and shoulders.

ES Potential Triangle Could Morph Into Other Formations

ES Potential Triangle (Navy Blue) Could Morph into H&S or Inverse H&S

ES Potential Triangle (Navy Blue) Could Morph into H&S or Inverse H&S

So we continue to have a consolidation between ES 1955 and ES 1980, where no consolidation was needed. ES was all set up to run to the top of its orange megaphone and make a new high, killing the head and shoulders on the chart.

It was also legal for a downward breakout from the orange megaphone for a plunge to the bottom of a larger megaphone at roughly 1850.

But instead it seems to be forming a triangle here (navy blue on chart).

If the triangle actually completes, it will likely break out downwards. Triangles in a head and shoulders right shoulder position are usually bearish.

But if the triangle breaks out before completing, it’s probably forming either an inverse head and shoulders (if the premature breakout is downwards) or a head and shoulders (if the premature breakout is upwards).

I’d short any breakout through ES 1955/SPY 196 because of the potential for a melt-down to ES 1850 or even a bit lower. And I’d go long on any breakout through ES 1980/SPY 198.50 because of the potential for a melt-up to a new all-time high.

But any breakout from an incomplete triangle would have high odds of running out of steam well below the target.

For a premature breakout upwards, there could be trouble in the ES 1988-1991.25 area. For a premature breakout downwards, the bottom of the 2-year+ rising wedge in the ES 1940ish/SPY 195ish area is an obvious major hurtle to get through.

SPY Put-Call Ratio (Updated)

The SPY put-call ratio as of yesterday’s close was 3.08.

That’s very bullish, but it was not yet at its top Bollinger Band and its not opex week, so it could get more bullish still.

The CPCI was at 0.66, at its bottom Bollinger Band.  The last time that happened was August 11.

This makes it likely that either the potential triangle will break out upwards, or that it will morph into a megaphone or even an inverse H&S that breaks out upwards.

Could Be a Triangle

Could Be a Triangle, But Could Still Morph into Something Else

Could Be a Triangle, But Could Still Morph into Something Else

ES could be forming a triangle, but it could still morph into a megaphone or an inverse H&S or an H&S.

If it plays out as a triangle, it’s bearish, with high odds of downward breakout.

There’s a larger head and shoulders on ES, and the general rule is that a megaphone right shoulder is bullish, but a triangle right shoulder is bearish.

Euro Dive Saves ES for Now

Euro Futures Dived to the Bottom of Their Price Channel Overnight

Euro Futures Dived to the Bottom of Their Price Channel Overnight

Euro futures dived to the bottom of their price channel overnight.

They could retrace or move sideways to the top of the channel and continue down, or they could break the channel bottom here, retrace a bit, and then start down into a steeper channel.

This is also the point where the euro could start a sideways move like a megaphone, although the plunge to the channel bottom makes that less likely.

The plunge pushed ES up to a level where the head and shoulders right shoulder doesn’t look right. ES could be forming a megaphone here or it could be forming a different head and shoulders.

ES is Consolidating Between 1955 and 1979.50 - Unclear Which Way it will Break Out

ES is Consolidating Between 1955 and 1979.50 – Unclear Which Way it will Break Out

In any case, it’s consolidating between 1955 and 1980. It could probe those levels briefly forming a megaphone, but an actual breakout through one of those levels would be a set-up to go long or short.

IWM Critical Decision Point a Little Below

IWM Megaphones and Interior Megaphones

IWM Megaphones and Interior Megaphones

A little bit lower and IWM has to make a decision whether to turn up at the bottom of its potential orange megaphone (green and purple scenarios), or just negate that megaphone and plunge to the bottoms of the pink and gray megaphones (blue scenario).

If ES breaks down through its potential head and shoulders neckline at 1955.50, IWM will likely go for the blue scenario plunge.

High Alert! Potential Very Bearish Set-Up on ES

Orange Megaphone Might Be Setting Up a Breakout Downwards

ES Minimum Price Channel with Megaphone Potential Downward Breakout

ES Minimum Price Channel with Megaphone Potential Downward Breakout

The Sunday night move back down to ES 1955.50 was so wrong I couldn’t figure out what it meant. It didn’t make technical sense in terms of the set-up on the chart. Usually when that happens I’ve missed something.

So I’ve been looking at the chart, and there is a set-up that I missed earlier.

The move down that started at the high formed a price channel (purple on chart).  It was a classic minimum-touch price channel, meaning two touches on the channel top alternating with two touches on the channel bottom, with the price channel low before breakout in the middle of the channel.

After an upward breakout from a price channel like this you almost always see a lower low or two, usually in the context of a megaphone.  And that’s what we got here–the orange megaphone on the chart.  Friday’s move up was a retrace to the orange megaphone VWAP.

Normally you’d see another trip to the top of that orange megaphone, followed by another trip to its bottom, and then a retrace to VWAP for a decision on which way the thing wants to break out.  But those extra moves aren’t absolutely required.  The orange megaphone has met all minimum requirements for a downward breakout right now.

Small Head and Shoulders has Formed with Neckline at VWAP of Four-Month Megaphone

Since meeting the minimum requirements for a downward breakout, ES has been forming a potential head and shoulders (see chart above) with a neckline at the VWAP of a larger four-month megaphone on the ES chart (see red megaphone below).

ES Four-Month Megaphone (Red)

ES Four-Month Megaphone (Red)

ES spent most of today forming a megaphone at the right-shoulder top area for that potential head and shoulders.

Close-Up of Megaphone at Top of Potential Right Shoulder

Close-Up of Megaphone at Top of Potential Right Shoulder

If that little megaphone breaks out upwards, the little head and shoulders is failing and you can expect the usual fast move up to the orange megaphone top. But if that little megaphone breaks out downwards, it’s likely headed to a downward breakout through the neckline of that head and shoulders.

And that would mean a breakout through the red megaphone VWAP.

Breakout Target Would Be 1800-1850

A breakout downwards through the red megaphone VWAP would target the red megaphone bottom in the 1850 area. The line on the chart is a guideline, and the price could go a bit lower or higher.

There’s a VWAP of a still larger megaphone somewhere between 1800 and 1850. The price would usually go for that, usually in the context of forming a bottoming megaphone.

A retrace to the red megaphone VWAP after that would also be a retest of the bottom of the 2-year+ rising wedge and a right shoulder on a potential major head and shoulders.

ES Potential Major Head and Shoulders

ES Potential Major Head and Shoulders

So, assuming this little megaphone at the top of the right shoulder of the potential small H&S breaks out downwards, you should short the breakout in case it turns into the move to 1800-1850. The only significant hurtle after that will be at the bottom of the 2-year+ rising wedge.

SPY Price Channel Breakout

SPY Price Channel Appears to be Breaking Out

SPY Price Channel Appears to be Breaking Out

The SPY price channel is breaking out after the minimum touches on each side and a low in the middle of the channel.

This cancels the melt-down scenarios, though you will usually see a lower low after breakout.

The breakout could form a triangle or megaphone down here, or retrace something like 1/2 to 2/3 of the move down from the high before the lower low.

Usually the only times you won’t see a lower low are when the breakout forms a triangle or inverse head and shoulders (with only the right shoulder to come) that breaks out upwards.