Ascending Triangle Breakout Failed

On May 16 I posted that the impending ascending triangle breakout on the ES daily chart was likely to be a fake-out.

The Breakout from the SPX Ascending Triangle was Brief

The Breakout from the SPX Ascending Triangle was Brief

Last Tuesday the SPX reentered the formation.  On Wednesday, the SPX retested the formation top.  On Friday the SPX closed inside the triangle for the day and for the week.  The SPX had roamed outside of the formation for five days, including the breakout day.

Once a breakout on an ascending triangle fails, the target becomes the formation low.  At the moment, that’s at roughly the level of the 200 dma.

A retrace to the formation low would put a potential H&S on the chart.  The right shoulder minimum retrace target would be ES 2080.

Some Weekend Charts

QQQ Rising Megaphones and Rising Wedges

QQQ has Formed a Rising Megaphone Top with an Interior Rising Wedge

QQQ has Formed a Rising Megaphone Top (Pink) with an Interior Rising Wedge (Blue)

QQQ has formed a rising megaphone top (pink) with an interior rising wedge (blue). Another way of looking at QQQ is that it’s formed a rising wedge top (gray) with a rising wedge extension (blue) up the wedge bottom.

It looks like a no-brainer that QQQ will make a higher high, but it’s less clear on the NQ futures chart, which has been forming a megaphone since May 15.

Nasdaq Futures have been Forming a Megaphone (Navy Blue) Since May 15

Nasdaq Futures have been Forming a Megaphone (Navy Blue) Since May 15

NQ closed just above the navy megaphone VWAP on Friday.  That doesn’t guarantee that it won’t make a higher high, but it left itself an out.  It could top the current wave without a higher high and complete a larger head and shoulders top.

Here’s the NQ megaphone close-up:

NQ Megaphone Close-Up

NQ Megaphone Close-Up

So you have to be mentally prepared for a bounce off the megaphone VWAP back to the top, but if NQ starts breaking out downwards through VWAP, you have to be ready to deal with that too.

In any case, on the breakout from the blue rising wedge, QQQ should drop to the pink megaphone bottom, bounce, and then break out downwards with a target of at least 83.41, where you can expect another bounce.

But 83.41 should not be the end of the retrace.  There’s a larger rising megaphone on the chart that requires a retrace to 50.

The Initial Target is at the Bottom of a Larger Rising Megaphone - Ultimate Target is Around 50

The Initial QQQ Target is at the Bottom of a Larger Rising Megaphone – Ultimate Target is Around 50

The easiest way to play QQQ is to just stay long until you see a breakout through the bottom of the blue rising wedge on the daily chart.  A trip to the bottom of the navy blue megaphone won’t do it.  The price would usually bounce off the wedge and megaphone bottoms back to the megaphone VWAP before that breakout.

The breakout through the wedge bottom in that case would also be a breakout from the navy blue megaphone and a set-up to short.

ES Rising Wedge vs Head and Shoulders

ES Rising Wedge vs Head and Shoulders

ES Rising Wedge vs Head and Shoulders

ES could complete the purple rising wedge drawn on the chart above (green scenario) or put in a little head and shoulders (pink scenario) with a neckline at roughly ES 2080.

Everyone I know is mega-bullish for the rising wedge scenario and a new high, and the equities put-call ratio dropped sharply Friday as everyone bought calls for next week on momo stocks.

I’m an agnostic on a higher high, especially on a higher high before a return to ES 2080.

For one thing, oil put in the right shoulder on a complex H&S on Friday.

Oil Put a Right Shoulder on its Complex Head and Shoulders on Friday

Oil Put a Right Shoulder on its Complex Head and Shoulders on Friday

Oil is in a clear bottoming megaphone and needs a retrace to the 50-52.50 area to be legal for a breakout upwards. It could also put in another trip to the megaphone bottom at 47ish.

So I think oil has decent odds of breaking out of its complex head and shoulders early next week, and if it does that will put pressure on ES and SPY that may be enough to carry them back to the H&S 2080 neckline.

For another thing, ES has a beautiful falling megaphone on its short-term chart.

ES Potential Falling Megaphone (Orange)

ES Potential Falling Megaphone (Orange)

ES put in a substantial triangle top on its last move up to the top of the falling megaphone.  It didn’t just tag it in low volume on a Friday and reverse.

And the bears broke it out downwards from the triangle on pretty good volume for a Friday.

Plus that topping triangle was a triple retest of a little H&S neckline up there (blue on chart).

And there’s more.  ES bounced off the trend line from the May 7 low and retested the triangle breakout, which held.  It could have set up a Sornette melt-up there, but it didn’t.

ES 2080 is an important multi-megaphone VWAP area and potential H&S neckline, and odds are decent to good that ES will complete that falling megaphone before putting in a very deep right shoulder on the potential H&S.

GS Rising Wedge Across Major Megaphone VWAP

GS Needed a Break Through the Top to Complete Its Pink Rising Wedge -

GS Needed a Break Through the Top to Complete Its Pink Rising Wedge – Happened Last Week

GS isn’t the entire market, but I keep an eye on it, and it has completed a rising wedge (pink) across a major megaphone VWAP (orange) on its long-term chart. That is the single most bearish trading signal I know.

Rising wedges usually complete with a break of the top, and that finally happened last week.

GS appears to be putting in a small H&S at that wedge top, and is completing the right shoulder of it now.  A small H&S can always morph into a bigger H&S, but odds are high that GS has pretty much run out of upside for now.

On a downwards breakout from the pink rising wedge, the target for GS is roughly the 2011 low, where there’s another major megaphone VWAP.

IBB Rising Wedge with Megaphone Top

IBB has Reached its Inverse H&S Target (Red Neckline) with a Rising Wedge (Blue) and Topping Megaphone (Orange)

IBB has Reached its Inverse H&S Target (Red Neckline) with a Rising Wedge (Blue) and Topping Megaphone (Orange)

IBB has reached the target area for the inverse H&S it formed at its late April/early May lows.

It formed a rising wedge en route to the target, and is now completing a megaphone top (orange) for that rising wedge.

That’s important because it’s likely that IBB is forming a top similar to gold.  After a bubbly move up, when you see a correction start with two big waves down, you often see a consolidation before the correction continues.  In that kind of top you’d expect IBB to reverse about here to return to the late April low.

Below are charts of IBB and gold to give you an idea.

IBB May Be Forming a Top Similar to Gold

IBB May Be Forming a Top Similar to Gold

Now look at gold’s top:

Gold Top - Two Big Waves Down, then Consolidation Before Plunge

Gold Top – Two Big Waves Down, then Consolidation Before Plunge

Trading Notes

11:21 a.m. Pacific Time:  Now there’s a potential H&S on today’s bounce off the trend line.  This should complete and break out downwards to ES 2080, then into a right shoulder.

But you always have to watch for things like an H&S upward breakout.  In other words, you have to be alert on the coming right shoulder of today’s bounce H&S in case the right shoulder fails.

(It usually wouldn’t after a rising megaphone, but if it does, it’s another Sornette melt-up set-up, and a bigger one this time.)

Also, the bounce off the trend line could turn into something like a triangle.

12:30 p.m. Pacific Time:  The way the bounce and the retrace of the bounce covered that territory makes me think ES is stuck in another triangle.

Could be a triangle between today’s low and the bounce high.

Could still be a triangle between today’s low and ES 2122ish.

Could be another inverse H&S forming down here for a breakout to another minor new high.

Rising Megaphone Top Across Triangle Top

ES has Formed a Rising Megaphone Top Across the Top of the Triangle (Gray) that Began Forming in February

ES has Formed a Rising Megaphone Top Across the Top of the Triangle (Gray) that Began Forming in February

ES cancelled its potential melt-up set-up to 2122.

Instead, it’s formed a rising megaphone top (navy blue on chart) across the top (gray line) of the triangle that began forming last February.

A rising megaphone top across this critical line is bearish.  I expect the top to complete here with moves roughly like the green or purple scenario drawn on the chart (purple scenario is more likely).

Then ES should continue down to the potential H&S neckline in the 2080-2090 multi-megaphone VWAP area.