Good Spot for a Diamond Top or Continuation Pattern

This Week's ES Melt-Up will Likely Form a Rising Megaphone

This Week’s ES Melt-Up will Likely Form a Rising Megaphone

Melt-ups like the one we’ve seen this week typically occur as the second (B) wave of triangles or in the right shoulder of a head and shoulders.

Diamond Top or Continuation Pattern

Diamond Top or Continuation Pattern

That means we could see a quick move down from the market’s retrace target of 2100 into a head and shoulders breakout (purple scenario).  But the FOMC meeting at the end of July is more likely to keep the market moving sideways into August.

That’s means we’re likely to see a diamond top or continuation pattern complete on the ES 60-minute chart.

ES Inverse Head and Shoulders

ES is Likely to Complete an Inverse H&S Bottom on its Brexit Mini Crash

ES is Likely to Complete an Inverse H&S Bottom on its Brexit Mini Crash

ES is likely to complete an inverse H&S bottom on its Brexit mini crash. It has continued melting up overnight but has formed an extended rising wedge in the process.

If ES should put a megaphone right shoulder on its inverse H&S, it could take out the Brexit low by a bit, morphing the existing inverse H&S into a larger one. But that’s not as likely as when a right shoulder megaphone forms on an upright head and shoulders.

ES still has a mandatory retrace target of at least 2100 to retrace the falling megaphone it formed on the Brexit mini crash.

Complex H&S vs Megaphone Top vs Sornette Melt-Up Set-Up

Complex H&S vs Megaphone Top vs Sornette Melt-Up Set-Up

If ES reverses at 2100, or starts forming a top at 2080 that tags 2100ish, it’s likely putting a right shoulder on the potential complex head and shoulders on the 60-minute chart (purple scenario).

The pink scenario represents a megaphone top from which ES breaks out downwards.

The green scenario is a Sornette melt-up set-up with a target roughly 300 points higher.

The blue scenario is a continuation megaphone with a target roughly 150 points higher.

rising megaphone trading formation

ES has Confirmed a 5-Year Rising Megaphone

ES has confirmed a 5-year rising megaphone on its daily and weekly charts. That would usually mean a significantly higher high to complete the formation.

That means any downwards breakout from the consolidation on the 60-minute chart would likely be stopped by the bottom of the 5-year rising megaphone (usually there would be a small break of the bottom).

Still Expecting a Big Rally

ES Still has a Mandatory Retrace Requirement at 2100

ES Still has a Mandatory Retrace Requirement at 2100

ES still has a mandatory retrace requirement at 2100 and a CBOE Equities Put-Call Ratio surge through its top Bollinger Band to work off with a rally.

ES is also trying to recross its potential H&S neckline upwards. The recross, assuming it continues, should send bears scurrying for cover.

If instead of a rally we see a triangle form across that neckline, it would be bearish. That triangle would override all other set-ups on the chart and have odds of 90%+ of breaking out downwards.

However, we’re unlikely to see a triangle form here.  Assuming no triangle, there’s now a potential complex H&S on the 60-minute chart.  If ES puts in a right shoulder with a top at 2100ish, that H&S is likely to play out (blue scenario).

But there’s also a huge potential Sornette melt-up set-up on the 60-minute chart (purple scenario).  An upwards breakout from the navy blue megaphone, especially with a double bobble as drawn, would usually mean a big melt-up.

ES could also return to the 2063 or 2080 area and start a new megaphone there to work the price back to 2100.  A new megaphone at 2063 or 2080 would likely mean a continuation of the sideways price action we’ve seen for the past couple of months.

IWM Flat-Bottomed Megaphone Across Critical Level

IWM has Formed a Flat-Bottomed Megaphone (Red) Across VWAP of the Big Pink Megaphone that Began Forming in Late 2013

IWM has Formed a Flat-Bottomed Megaphone (Red) Across VWAP of the Big Pink Megaphone that Began Forming in Late 2013

IWM has drawn a flat-bottomed megaphone (red) across VWAP of the big topping megaphone it’s been forming since late 2013.

If it can actually break out downwards from the flat-bottomed megaphone, it’s a favorite to break out downwards from the giant topping formation with a target of roughly 50-60.

If it fails to break out through the bottom of the flat-bottomed megaphone, or it puts in only a small fake breakout, it’s a favorite to at least retest the formation high. And an upwards breakout from the flat-bottomed megaphone would target the all-time high at roughly 130.