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.

British Pound Closing in on a Bottom

The British Pound is Completing a Megaphone Bottom (Red) within a Larger Megaphone

The British Pound is Completing a Megaphone Bottom (Red) within a Larger Megaphone

The British pound is completing a megaphone bottom (red) within a larger megaphone (blue on chart).

It is likely to form an inverse H&S or smaller megaphone bottom here before a retrace to at least the red megaphone VWAP.

It could put in a lower low from there in a double wave down within the red megaphone (purple scenario) or it could go all the way for the red megaphone top before a pullback to its VWAP to put an inverse H&S at the blue megaphone VWAP (green scenario).

A breakout through the blue megaphone VWAP would target the blue megaphone top.

CPCE Spike Would Usually Mean a Strong Move Up

The CPCE Spiked Through Its Top Bollinger Band on Friday - That Would Usually Be Followed by a Strong Price Move Up

CPCE Spiked Through Its Top Bollinger Band on Friday – That Would Usually Be Followed by a Strong Price Move Up

The CBOE Equities Put-Call Ratio (CPCE) put in a big spike up on Friday, up through its top Bollinger Band.  This is a strong set-up for a big move up in price.

The CPCE isn’t up there on its own.  The SPY put-call ratio put in a good jump as well, and the CPCI is still high from several days ago.

The principle is that everyone and his mother has already bought protection, so there’s nowhere for the market to go but up.  Last night on twitter 20 different traders told me why the signal wouldn’t work this time (Brexit, etc.), but they’ve told me the same thing every time this signal has triggered.

When ES Broke Out of its Brexit Falling Megaphone (Orange) without Having Completed an Inverse H&S, It was Likely to Megaphone to at Least a Retest of the Low, and It Has

When ES Broke Out of its Brexit Falling Megaphone (Orange) without Having Completed an Inverse H&S, It was Likely to Megaphone to at Least a Retest of the Low, and It Has

When ES broke out of its Brexit falling megaphone (orange on chart above) without having completed an inverse H&S bottom inside the formation, it was likely to megaphone its way to at least a retest of the low (and usually a slightly lower low), and it has done that.

Right now ES is putting in a bottoming megaphone (blue) within a right shoulder megaphone (silver) that will likely work the price back up to at least its orange falling megaphone retrace target of 2100.

Flat-Bottomed Megaphone (Red) vs Megaphone (Blue)

Flat-Bottomed Megaphone (Red) vs Megaphone (Blue)

The ES 60-minute chart is ambiguous. It can be seen as a flat-bottomed megaphone with a likely fake breakout downwards. That would likely be followed by a breakout upwards for a surge at least 125 points higher.

The chart also qualifies as a Sornette melt-up set-up, which is essentially a shallow megaphone that breaks out upwards without a retrace to VWAP.

Another way of looking at the chart is as a topping megaphone or complex head and shoulders that is about to put in a right shoulder with a top at 2100 (pink scenario).

So 2100 is a critical decision point.

rising megaphone trading formation

ES has Confirmed a 5-Year Rising Megaphone

ES has confirmed a 5-year rising megaphone (silver on chart above) on its daily and weekly charts. So if the H&S set-up completes, we can expect a pullback to roughly the rising megaphone bottom at 1900ish. Usually the bottom would get broken a bit on that move.

Otherwise we can expect the price to take off into a melt-up that would usually top with a head and shoulders formation. If the H&S completes inside the rising megaphone, with a right shoulder that’s a bounce off the rising megaphone bottom, it would usually be a strong set-up for a retrace to the rising megaphone bottom.

If the H&S fails to complete inside the rising megaphone, it would usually lead to a prolonged sideways move with at least a retest of the top and usually a slightly higher high before a larger correction.

 

ES Made it Back to Neckline without Setting Up a Further Crash (Updated)

ES Made it Back to the Neckline (Blue) of its Potential Complex H&S without Forming a Set-Up for a Further Crash

ES Made it Back to the Neckline (Blue) of its Potential Complex H&S without Forming a Set-Up for a Further Crash

ES made it back to the neckline (blue) of its potential complex head and shoulders without forming a price channel set-up for a further melt-down.

Last Night's Brexit Drop Formed a Falling Megaphone with a Retrace Target of 2100

Last Night’s Brexit Drop Formed a Falling Megaphone with a Retrace Target of 2100

The drop on Brexit formed a falling megaphone instead, and ES has now formed an inverse head and shoulders bottom for the falling megaphone. However, the inverse H&S set-up isn’t the perfect type that completes within the falling megaphone. That means the inverse H&S could still morph into a megaphone bottom with a lower low.

A triangle right shoulder would make an upwards breakout through the neckline without a lower low a strong favorite.

Last night’s falling megaphone has a strong retrace requirement of 2100.  That would put a perfect first right shoulder on the complex H&S on the 60-minute chart (green scenario, top chart).

But there’s also now a giant Sornette melt-up set-up on the 60-minute chart (purple scenario, top chart).  That would represent a H&S failure with a target roughly 300 points higher.

ES could also keep moving sideways for months by returning to 2080 and starting a new megaphone there.  Eventually all the megaphones inside megaphones would likely form something like a big triangle.

Update:  Note the 5th wave melt-down on the red megaphone (top chart).  That actually makes an upwards breakout from that megaphone the favorite.

 

 

High Alert! Watch Out for a Melt-Down Set-Up

Rising Megaphone

ES Confirmed a New Rising Megaphone (Red) Overnight with a New High for the Move Off the June 16 Low

ES confirmed a new rising megaphone for the move off the June 16 low overnight. Eventually that formation has a retrace requirement of at least 2053.

But right now ES is still working on the retrace requirement for the falling megaphone into the June 16 low. That retrace target is 2115.

The strongest set-up would be a complete little head and shoulders top inside the red rising megaphone, with a right shoulder that is a bounce off the formation bottom before the price breaks out from both.  A breakout from both the H&S and red rising megaphone could then be shorted to at least 2053 and possibly 2000ish.

If ES fails to form a complete H&S before breaking out of the red rising megaphone, it would usually form a megaphone right shoulder outside the formation, and that would mean another new high before the retrace to at least 2053.

High Alert! Potential Melt-Down Set-Up

Potential Price Channel Melt-Down Set-Up

Potential Price Channel Melt-Down Set-Up

One thing to consider about your positioning at today’s close is the potential for a price channel melt-down set-up to form after the close.

You don’t get a lot of price channel melt-down set-ups, but when you do, it tends to be in spots like this.

There’s a big news event (Brexit vote outcome) coming down after the close.  And there’s a potential complex head and shoulders on the chart.

In August 2015, we had a set-up exactly like this one as the market closed before the overnight China crash.

If the red rising megaphone completes with a proper H&S before breakout, you’ll sometimes see a narrow price channel form and confirm soon after the breakout.  If the price channel confirms and then breaks out downwards, it’s a melt-down set-up. (See set-up in silver price channel.)

Price channel melt-down set-ups overrule every other trading formation and target on the chart.  For example, instead of a normal-sized right shoulder on the complex H&S on the chart, we could see a tiny bounce off the H&S neckline at 2000 to confirm a steeper price channel before that too breaks out downwards.

rising megaphone trading formation

ES 5-Year Rising Megaphone – Bottom would Usually Stop Any Drop Unless a Price Channel Melt-Down is Underway

ES has confirmed a new 5-year rising megaphone on its daily and weekly charts. Normally the bottom of that formation would stop any major pullback before ES continued to a significant new high (there would typically be a small break of the bottom).

But once a price channel melt-down gets underway, you can’t count on normal resistance to stop the drop.  Instead, you have to wait for one of the rollover price channels to break out upwards and actually form a bottom.