Still a Good Spot for a Megaphone

Can't Guarantee a Megaphone Here, But Still a Good Spot for One

Can’t Guarantee a Megaphone Here, But Still a Good Spot for One

It’s still a good spot for a megaphone. If ES is going to form one, it should start to zigzag back and forth very soon. For example, a reversal at 2080 to put in a lower low would be standard, then up to 2090ish, another lower low, etc.

This is also a good spot to watch for a mini Sornette bubble set-up. It would look like this.

B Waves Before Crashes are Often Mini Sornette Bubbles

B Waves Before Crashes are Often Mini Sornette Bubbles

You often see Sornette bubble retraces right before crashes.  A Sornette bubble set-up would be a good excuse for nimble short-term traders to pick off a quick long play.

ES would usually retest the bottom of the rising wedge it broke out of today, and it would usually get there promptly.

ES Would Usually Retest Bottom of Rising Wedge Promptly

ES Would Usually Retest Bottom of Rising Wedge Promptly

Trading Notes (Updated)

ES is below 2080 and no one should be long for any reason.

ES looks like it’s going all the way for 2065ish.  Should bounce or triangle there.

Update, 12:15 p.m. Pacific Time:  Although usually ES would retest the bottom of its rising wedge at up around 2100, and it would usually do that within a day or two, really there’s nothing technical to stop it before the triangle bottom except the potential H&S neckline at 2065.

Update, 12:20 p.m. Pacific Time:  Could put in a falling megaphone here, which would be a retrace to 2100ish followed by a fast move to triangle bottom, then falling megaphone retrace, then kaboom.  We’ll see.


Vegas Indicator

Just heard on the radio that Vegas hotels are suddenly cutting room prices for Mayweather/Pacquiao fight weekend.

The guy who was interviewing the hotel info person said, “Uh-oh.”

Everyone in Vegas who heard that knew what it meant.  Weakness in vice means weakness for the broader economy to follow.

Perfect Spot for a Megaphone

Perfect Spot for a Megaphone Stall-Out Into NFP Report

Perfect Spot for a Megaphone Stall-Out Into NFP Report

ES seems to be forming a falling wedge to its complex H&S multi-neckline area. This is a spot with great odds for a megaphone to form.

First, the falling wedge is likely to run out of steam with the minimum number of required touches on its sides.  That almost always results in the wedge breaking out into a sideways move like a megaphone.

Second, ES has multiple retrace targets above and yet still hasn’t reached one of its neckline targets below.  The way it would usually carry out the trips to these conflicting nearby targets is with a megaphone.

Third, the nonfarm payrolls report is next week.  Big turns are often made in the days around that report, and the market loves to use megaphones to buy time.

A megaphone here would put a megaphone right shoulder on the H&S on the chart.  Usually megaphone right shoulders are a tell of a fake head and shoulders, with the megaphone right shoulder leading to a new high.  But that’s not the case when there was a megaphone left shoulder leading into the head of the existing H&S.

A megaphone right shoulder after a megaphone left shoulder would usually break out downwards.

Longer-Term Targets and Projected Bounces

Bounces and Targets

Bounces and Targets

Assuming we clear this topping area, the first target for a big correction would be the October 15 low, which is the minimum retrace target for the rising wedge ES has formed since that low.

In theory, ES could put in a higher high after reaching that target, but I don’t expect that to happen because of other long-term formations on the chart.  Specifically, if ES reaches the level of the October 15 low, it will have broken out of its 3-year price channel (bright blue on chart) and, more importantly, it will have broken out of the rising megaphone top (red on chart above) across the top of its orange rising megaphone.

On the way to the October 15 low, ES will definitely put in a bounce off the bottom of the blue price channel as well as a bounce off the bottom of the red rising megaphone.  There will also be some kind of bounce off the level of the October 15 low, although it is likely to be a lot smaller than the one drawn on the chart.

The VWAP of the orange rising megaphone on the SPY chart is at roughly 125.  If this correction is fast enough, SPY would reach 125 right about the time it intersects with the orange rising megaphone bottom.

That’s important, because the orange rising megaphone represents a Sornette bubble formation.  ES and SPY are completing part 2 of that bubble formation.  Sornette bubbles often put in a Part 3, and when it occurs it’s the fastest, biggest wave of the bubble–the part everyone recognizes as a bubble.

You’d expect a Sornette bubble Part 3 to reverse somewhere between the 2011 high and low, so SPY 125 would be a perfect turning point for a launch into a melt-up to new all-time highs.

If there isn’t going to be a Part 3 to the bubble, we’ll see ES and SPY establish a big bottoming pattern and trading range down in the target area, probably across it.

The Fed could intervene at some point to stop this correction.  If that’s going to happen, important market players will know it in advance and start realigning their bets according.  We’d see signs of that realignment on the chart and react accordingly.


Trading Notes

If you’re short, you want to see dip buying alive and healthy as the market heads into a major correction, because then you avoid the most irritating short squeezes where market makers are unloading unwanted inventory.

If dip buying is alive and healthy, market makers aren’t accumulating too much unwanted inventory, so you see smaller rallies with the long squeezes feeding a continuing sell-off.

Classic Triangle Top

Classic Triangle Top (Pink) and Megaphone Top (Orange) with H&S Across VWAP

Classic Triangle Top (Pink) and Megaphone Top (Orange) with H&S Across VWAP

ES is finishing up a classic triangle top (pink) with a fake breakout through the top before the real breakout through the bottom.

It’s also completing a classic megaphone top (orange on chart) with a big head and shoulders across VWAP.

Usually when you get a topping formation like a big clear H&S across VWAP of a topping megaphone, the price is going to break out downwards from the megaphone after the breakout from the VWAP topping formation (purple scenario).

And triangle tops don’t require bounces off the bottom.

But because ES put in a higher high on the false breakout through the pink triangle top, I can’t absolutely rule out a bounce from either the bottom of the pink triangle or somewhere near 2000 back to 2080 (green scenario) before the correction to the October low really gets going.