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.