Big Picture Update

ES is Working on the Red Megaphone, but May Complete the Blue Triangle First

ES is Working on the Big Red Megaphone, but May Complete the Blue Triangle First

ES ended Thursday in the critical decision wave of a new price channel (see post).

The price channel could literally melt the price down to 1850ish by the open Monday, or ES could bottom right here for a continuation pattern like a triangle or a big wild megaphone that could even put in a squeaker new high for last week’s Santa rally.

But whatever it does, ES has unfinished business on its daily chart, and it is about to head down to mop up.

ES has a confirmed megaphone (red) on its daily chart that requires a trip to its bottom.  However, megaphones often redraw their sides once they get this big.  So ES must take out its September 29 low at this point, but it doesn’t have to take out its August 24 low yet (though it could).

Also, crashes like the one into the August 24 low typically put in a prolonged consolidation before resuming the move down.  So here is the kind of price action we’re most likely to see coming up.

1.  ES could just move quickly all the way to the existing red megaphone bottom (green scenario), putting in a retrace to 2000 from 1950ish en route.

2.  ES could take out the September 29 low, but reverse somewhere between that level and the existing red megaphone bottom.  In that case, it is likely to complete a triangle (blue on chart) between wherever it reverses and the existing all-time high (purple scenario).

3.  ES could take out the September 29 low but reverse somewhere above the existing red megaphone bottom and return to the red megaphone VWAP at 1950 to start a new megaphone there (orange scenario).  Often this scenario would lead to the formation of a triangle similar to the purple scenario, but it would be a lot harder to trade.

The last move to the red megaphone top was a clear 5th wave melt-up, so ES is unlikely to put in another wave all the way to the megaphone top.  But it could put in a new all-time high in the course of completing a big triangle up here.

The most likely scenarios are the purple and orange, although either could take out the August 24 low by a bit before heading back up to complete a triangle.

ES End-of-Day Price Channel in Critical Decision Wave

ES Ended the Day with a Confirmation of a New Price Channel (Red) that is Now in its Critical Decision Wave

ES Ended the Day with a Confirmation of a New Price Channel (Red) that is Now in its Critical Decision Wave

ES, as is its wont, ended the day with maximum suspense in the critical decision wave of a new price channel (red on chart).

It is now retracing to the potential H&S neckline it has presumably broken out of. If it reverses there and exits the channel to break out past the pre-retrace low, it will have broken out of the channel into a melt-down (green scenario).

But if it makes it all the way back to the channel top, it’s likely forming a bottom here for a retest of today’s high.

In that case, if ES reverses below today’s high, it is likely forming a triangle right shoulder on its H&S formation, and that’s bearish (purple scenario).  But if it passes today’s high, it will likely form a megaphone right shoulder (blue scenario).

Megaphone right shoulders can be continuation patterns if they stay fairly tight and put in the minimum number of waves before a downwards breakout, but usually they’re pretty loose and wild and manage to work the price up to a squeaker new high that will be the head of a larger head and shoulders.

ES just closed the first AH session right on the retest of its H&S neckline.

Looking for Another H&S Right Shoulder before Big Move Down

ES Needs a Right Shoulder from a Little Bit Lower to Complete the Red Megaphone and a Head and Shoulders Across the Blue Megaphone VWAP

ES Needs a Right Shoulder from a Little Bit Lower to Complete the Red Megaphone and a Head and Shoulders Across the Blue Megaphone VWAP

ES needs a retrace to VWAP from the bottom of its red megaphone to complete all retrace requirements for a breakout through 2000 into a big move down. It’s likely to redraw the megaphone bottom in this spot to roughly match the steepness of the megaphone top.

That will also put an H&S top across VWAP of the blue megaphone on the chart, which will make ES legal for a downwards breakout from that formation as well.  ES is already legal for a downwards breakout from the orange triangle on the chart.

And Tuesday’s melt-up wave to 2075 killed a potential falling megaphone on the chart, which means it also killed that formation’s potential retrace requirement.

ES is setting up for a move to a megaphone bottom at roughly 1937, followed by a retrace to that megaphone’s VWAP at roughly 2000, then a breakout downwards to at least 1850.  At 1850 it could consolidate a bit or bounce before continuing down to retest the August 24 low.

ES formed a large megaphone off the August 24 low and it must now put in a trip to the megaphone bottom.  That megaphone bottom will be in the low 1700s by the time ES gets there.  However, ES could redraw that megaphone bottom at this point to put in a bounce from somewhere between the August 24 low and the September 29 low.

ES must then bounce back to at least the megaphone VWAP at 1950 before either breaking out downwards from this megaphone or starting a new megaphone across 1950.  A new megaphone across 1950 would usually mean ES is forming a big triangle between roughly the August 24 low and the current all-time high.

I consider this triangle scenario the most likely scenario at this time.  That’s because big melt-ups that end with a crash usually spend a long time consolidating that crash before continuing the move down.

Potential Triangle Right Shoulder is a Strong Set-Up

ES Appears to be Putting In a Triangle Right Shoulder (Red) on its H&S (Blue Neckline

ES Appears to be Putting In a Triangle Right Shoulder (Red) on its H&S (Blue Neckline)

ES is trying to put a triangle right shoulder (red on chart) on its potential H&S (blue neckline) for the move out of the December 20 low.

If the triangle completes and breaks out downwards, that’s a mandatory short for me. This could be the top before a move all the way to a retest of the August 24 low (though there would be high odds of a big bounce off 1937ish for a retest of 2000).

ES would have to get through the 2048 VWAP level of the pink megaphone on the chart to confirm that the top is in.

The red triangle could still morph into a megaphone right shoulder, which would usually mean a squeaker new high is coming.  An upwards breakout from a complete or incomplete triangle would likely mean a megaphone is forming.

H&S vs Megaphone Top

ES Potential Head and Shoulders Top (Red Neckline) Needs a Right Shoulder but Could Morph into a Megaphone Top

ES Potential Head and Shoulders Top (Red Neckline) Needs a Right Shoulder but Could Morph into a Megaphone Top

ES has a potential head and shoulders top on its 2-minute chart for the move out of the December 20 low. To confirm it needs to put in a right shoulder retest of the top of its pink megaphone and then break out downwards (green scenario).

More likely, ES will put in a megaphone right shoulder. Megaphone right shoulders usually mean a squeaker new high that will serve as the head of a larger H&S (purple scenario).

Then it will be down to the pink megaphone bottom at a little over 2000, a mandatory retrace to VWAP at a little over 2050, and down for a breakout through 2000 with a minimum target of 1937ish before a retrace to 2000 followed by a swoosh down to retest the August 24 low.

ES Triangle vs Triangle

ES has Put a Megaphone 5th Wave Across the Top of its Orange Triangle

ES has Put a Megaphone 5th Wave Across the Top of its Orange Triangle

ES is forming a megaphone top on its Christmas week rally. It is now putting in a 5th wave melt-up within that megaphone, and it has crossed the orange triangle top as expected.

ES can now put in a smallish top on the top of the orange triangle before a breakout downwards from it (green scenario). Or it can redraw the orange triangle (gray lines) by taking out the December 17 high but not the triangle high and then putting in another wave up from the triangle bottom.

Either way, ES has a mandatory retrace to put in to the bottom of its red megaphone for a breakout roughly equal in size to the breakout through the formation top.  That means the orange/gray triangle is a strong favorite to eventually break out downwards to put in a trip to roughly 1950 or even 1900 before a retrace to the red megaphone VWAP at roughly 2000.

There are other mandatory retrace targets at 1850 and likely the August 24 low which ES should get to after that.

Gold Flat-Topped Megaphone

Gold Flat-Topped Megaphone (Red) within Larger Blue Bottoming Megaphone

Gold Flat-Topped Megaphone (Red) within Larger Blue Bottoming Megaphone

Gold has now formed a flat-topped megaphone (red) within its blue bottoming megaphone.

A breakout through the top would target roughly 1130 before a likely retrace to the blue megaphone bottom.  A breakout through the bottom would target roughly 1015-1020 before a larger swing to roughly 1130.

Top or Not?

High So Far is an Exact Tag of the Orange Triangle Top

ES has Put a Legal H&S Top (Blue Neckline) on its Christmas Week Rally but is Likely to Put in Another Swing Up to Complete the Red Megaphone Top

ES has Put a Legal H&S Top (Blue Neckline) on its Christmas Week Rally but is Likely to Put in Another Swing Up to Complete the Red Megaphone Top

ES has put a legal head and shoulders top (blue neckline) on last week’s rally, but the trouble is that the top of the head is an exact tag of the orange triangle top.

If the triangle is going to break out downwards–and the megaphones on the chart require a downwards breakout–last week’s rally can’t end on an exact touch of that triangle top.

If ES fails to put in a break of the orange triangle top here, it must come back and do it after the next trip to the formation bottom.  If ES is going to break out through the orange triangle bottom after reversing here, it will put in another wave up to the red megaphone top first.

Here’s a typical way these moves would play out on the 60-minute chart:

Typical Scenario for this Set-Up on the ES 60-Minute Chart

Typical Scenario for this Set-Up on the ES 60-Minute Chart