On Friday, ES tagged VWAP of its big megaphone off the August 24 low. All it needs to complete an inverse head and shoulders with a neckline at that VWAP is a dip into a right shoulder followed by a breakout.
A bottoming pattern at or across the VWAP of a major megaphone is a set-up for a trip to at least the megaphone top and ES can keep running up in a breakout from the megaphone if it wants to. In other words, if the inverse H&S completes and breaks out upwards, it’s a set-up for a blow-off top.
Technically, an inverse H&S at the big red megaphone VWAP is not strictly required, as ES has already formed a falling megaphone across the VWAP of the big red megaphone. That in itself is a set-up for a blow-off top.
The purple scenario on the chart represents an inverse H&S failure. I can’t recall seeing one in a spot like this, so it’s unlikely.
Another way of looking at the trading set-up on the daily chart is as a triangle (blue in chart above). The January 20 low would be a classic fake breakout through the triangle bottom, which means that the market ought to next put in a real breakout through the triangle top for a trip to roughly 300 points higher.
Triangles are typically comprised of a series of megaphones inside megaphones across the triangle VWAP, which is at roughly the same level as the VWAP of the big red megaphone in the top chart.
What that means is that ES would often put in its inverse H&S right shoulder within a megaphone across this VWAP before taking off upwards.