Blow-Off Top Back in Play

Bullard Jawbone Chart

Bullard Jawbone Chart
h/t@Karla_Tango

For a while it’s been clear that Jim “Paint the Chart” Bullard of the Fed has been trying to paint a triangle on the SPX daily chart. Or at least it’s been clear that to get through 1800, the market was going to have to get through him.

But Bullard didn’t seem to want a blow-off top on the chart either. He seemed to want to paint plenty of base on the SPX daily charts–likely in the form of a triangle–for a natural breakout upwards once the long-promised recovery actually got started.

Legal Triangle (Orange) or Head and Shoulders Failure (Purple Neckline)

Legal Triangle (Orange) or Head and Shoulders Failure (Purple Neckline)

In fact, right on cue last week, as the market approached its triangle top, Bullard showed up to say that the April FOMC meeting was “live” for a rate hike.

But on Tuesday, Yellen stepped all over Bullard’s jawboning of last week (and the little pre-Easter sell-off that followed) with a speech heavy on worldwide weakness.  The market went into lift-off without even having put a decent retest of 2000 on the daily.

Now, even if the market can manage to get back to 2000 for that retest, it will be putting a potential Sornette melt-up set-up on the daily (green scenario in chart below) as well as a giant potential rising megaphone (red in chart below).

A Retest of 2000 from Here would Set Up the Red Rising Megaphone for a Blow-Off Top

A Retest of 2000 from Roughly Here would Set Up the Red Rising Megaphone for a Blow-Off Top

The red rising megaphone would be about to start its biggest fastest wave up.

And with the SPY and SPX Bollinger Bands tightly compressed on the monthly chart, the market is ready for a big move.

Bollinger Bands are Compressed on Monthly Chart

Bollinger Bands are Compressed on Monthly Chart

There are still mandatory retrace targets far below. But markets can put off retraces for a very long time, simply by morphing rising wedge tops into price channels into rising megaphones into larger rising megaphones. And if ES sets up the red rising megaphone in the chart above, all of the mandatory retrace targets can wait until that formation completes.

A typical way for the red rising megaphone to complete would be with a melt-up to the formation top, followed by a H&S top within the formation that would take the price to a higher high.

There is still one last chance for ES to reverse before a blow-off top set-up. After a series of failed attempts at topping megaphones, SPX has put a rising wedge (blue) on the daily. The rising wedge has broken out and is trying to form a head and shoulders with a neckline at roughly 2000 and a target of roughly 1920-1930.

Since 1920-1930 is roughly the level of the VWAP of the big megaphone off the August 24 low, a head and shoulders top here would likely set up a move to that level to begin a new megaphone (purple scenario) to hit all mandatory retrace targets and keep the market moving sideways for a while.

VIX Falling Megaphone Targets at Least 23

VIX is Working on an Inverse H&S Bottom for its Blue Falling Megaphone

VIX is Working on an Inverse H&S Bottom for its Blue Falling Megaphone

VIX is working on an inverse H&S bottom for its blue falling megaphone. A breakout from both the inverse H&S and falling megaphone targets at least 23 on the May contract.

If the right shoulder of the inverse H&S starts to megaphone, the route to 23 would tend to be wild (purple scenario).  The tip-off would usually be a very small megaphone starting across the breakout point from the blue falling megaphone.

Potential Melt-Up Set-Up on the Ted Spread

Ted Spread Price Channel

Potential Price Channel Melt-Up Set-Up on the TED Spread

The TED spread has a potential price channel melt-up set-up on the chart. After confirming a price channel with a period of coiling, the TED spread surged up to break the channel top yesterday in the channel’s critical decision wave.

The set-up would usually put in a small pullback today. If the TED spread then breaks out past the initial surge high, it would usually be breaking out into a melt-up that could take it back to the 2016 high or higher.

Here’s what Econbrowser.com says about the TED spread:

[It’s] the gap between 3-month LIBOR (an average of interest rates offered in the London interbank market for 3-month dollar-denominated loans) and the 3-month Treasury bill rate. The size of this gap presumably reflects some sort of risk or liquidity premium.

It’s an interesting development with the stock market reaching critical decision levels (see this morning’s earlier post).

The melt-up set-up would be cancelled by a return of the spread to the channel bottom or with a stall-out into a rising wedge twining up the channel top.

IWM is Struggling to Reach VWAP at 112.50

IWM is Struggling to Reach the Red Megaphone VWAP at 112.50

IWM is Struggling to Reach the Red Megaphone VWAP at 112.50

IWM is having a hard time getting to its big red megaphone VWAP at 112.50.

What would usually happen with a chart like this is that IWM would put a topping formation at or across 112.50 and then break out downwards from the big red megaphone with a target of roughly 60 (at the bottom of the purple rising megaphone that started forming in 2012). That’s the green scenario.

IWM has already put a megaphone right shoulder on a smaller H&S, and so this larger H&S would usually actually complete and break out downwards.

But I don’t know if this set-up will work with an entire world of activist central banks.  The alternate scenario (purple) is for IWM to start a series of megaphones inside megaphones across the red megaphone VWAP.  That series of megaphones would usually form a triangle, which would ultimately break out in one direction or the other to a red megaphone side.

The purple-into-blue scenario would ultimately put a still larger rising megaphone on the chart.  Someday, IWM will see 60 again one way or the other.

ES is Back at Megaphone Top

ES is Back at Its Navy Blue Megaphone Top

ES is Back at Its Navy Blue Megaphone Top

ES is back at its navy blue megaphone top. The previous megaphone high was an exact touch on the top. That made another trip to the top for a higher high almost certain.

Now ES has to break the navy blue megaphone top by roughly the same amount it broke through the megaphone bottom last Thursday. That break was roughly 13 points.

But ES is not limited to a move 13 points higher. This kind of top can complete in a day, but I’ve also  seen them last six weeks, with ES twining up the megaphone top before completing a topping formation.

The bigger and more prolonged the topping pattern up here, the more likely it is to be THE top before a breakout downwards back to the neckline of a head and shoulders that will also end up breaking out downwards. That neckline would likely be at roughly 2000.

A gap down through a neckline there would put an island top on SPY. That would be a strong set-up for a larger correction.

Also, the blue rising megaphone on the chart above has still not completed its required retrace to just below 2000.  That adds to the odds that ES will break down from a topping pattern up here back to the pink megaphone bottom at 2000.

But ES could drag this out further for a significantly higher high with a retrace to VWAP and reversal there (purple scenario).

The Lower Low Triangle Set-Up

The ES Price Action is Reminding Me a Lot of the Oct. to Mid-Dec. 2015 Price Action

The ES Price Action is Reminding Me a Lot of the Oct. to Mid-Dec. 2015 Price Action

There’s also another set-up I’m looking at that’s a variation on the H&S right shoulder triangle set-up posted a moment ago.

This set-up would be a redo of the October to mid-December 2015 price action, with ES taking out the March 24 low before completing a triangle right shoulder.

Good Chance a Triangle is Forming

ES has Formed a Series of Megaphones Inside Megaphones that Suggests a Triangle is Forming

ES has Formed a Series of Megaphones Inside Megaphones that Suggests a Triangle is Forming

ES has formed a series of megaphones inside megaphones that suggests a triangle is forming.

The triangle could morph into a head and shoulders (green scenario) to take out last Tuesday’s high.  Last Tuesday’s high would usually get taken out because it was an exact touch on a confirmed megaphone top.

But the triangle could also be a right shoulder triangle on a head and shoulders for which the head is already in (orange neckline, purple scenario).  A triangle right shoulder that breaks out downwards is one of very few outs for preserving last Tuesday’s high as the top.

ES has numerous mandatory retrace targets below.  The most important is at 1917 on the June contract.   That is the VWAP of the large megaphone that formed off the August 2015 crash low.  There are lower mandatory retrace targets at 1876 and roughly 1800, but ES could get to them in the context of forming a megaphone across 1917.

SPX Price Channel Set-Up vs Rising Megaphone Set-Up

The single most certain thing on the charts is that ES will take out last Tuesday’s high, which was an exact touch on a megaphone top.

ES Turned after an Exact Tag on the Top of the Blue Topping Megaphone

ES Turned Down Into Thursday’s Low after an Exact Tag on the Top of the Blue Topping Megaphone

Moves like the one out of the February 11 low don’t end on an exact touch of a topping megaphone top.

ES has Broken Out of its Blue Price Channel and Retested Its Bottom

SPX has Broken Out of its Blue Price Channel and Retested the Channel Bottom

The SPX broke out of its blue price channel on Thursday, fell to close to the 200 dma, then soared, closing on a retest of the channel bottom.

The price channel suggests the market will head down to take out Thursday’s low before a higher high. The move to a lower low and higher high could occur within a megaphone across Thursday’s close (green scenario).  The final wave up in that megaphone would be a melt-up.

But Thursday's Low was Also a Tag of the Red Rising Megaphone Bottom

But Thursday’s Low was Also a Tag of the Red Rising Megaphone Bottom

But Thursday’s low was also an exact tag of the red rising megaphone bottom. That suggests a move continuing straight up from Thursday’s close to a new high that will be the head of a head and shoulders top.

You often see a megaphone start in these spots where there are strong contradictory trading signals.

The Trading Set-Ups from Here

If you didn’t get long near Thursday’s low, the set-up is to get long if ES reenters the blue price channel.  If you are already long, the set-up is to switch to short on a breakout downwards through the red rising megaphone bottom.

If a breakout through the red rising megaphone bottom starts to megaphone across the breakout point, the market is in the green megaphone scenario in the blue price channel chart.