Potential Sornette Bubble Close-Up

If the Sornette Bubble Attempt is Going to Fail, It Will Happen in the Double Bobble

If the Sornette Bubble Attempt is Going to Fail, It Will Happen in the Double Bobble

There is a really good example of an attempt at a Sornette bubble happening right now after hours on ES.

The parts are labeled in the chart above.

If it’s going to fail and the triangle scenario is going to play out, it will fail in the double bobble, which will morph into a topping megaphone within the pink megaphone.

Little Sornette Bubble Off H&S Neckline

ES is Putting In a Little Sornette Bubble Move Off Its H&S Neckline

ES is Putting In a Little Sornette Bubble Move Off Its H&S Neckline

ES is putting in a little Sornette bubble move off its H&S neckline. It could retrace to the lumpy top area at ES 2066ish and then put in a Part 3 (green scenario), or it could retrace to the H&S neckline to form a smaller triangle along it (purple scenario).

Either way, this type of a bounce off the neckline suggests a short squeeze, meaning a rather small number of little-guy shorts closing out positions at the neckline, rather than big money buying.

It also suggests the H&S will break out downwards after some kind of sideways move here at or across the neckline.

Although I’ve drawn the sideways move as a triangle, it could also be a megaphone.

A genuine breakout through ES 2084ish would suggest a larger right shoulder triangle is forming.  Right shoulder triangles are bearish.

Dollar Sornette Bubble Retrace Coming

A DX Sornette Bubble Would Usually Retrace to Area of Lumpy Top Before Taking Off into Biggest, Fastest Part of Move

A DX Sornette Bubble Would Usually Retrace to Area of Lumpy Top Before Taking Off into Biggest, Fastest Part of Move

The dollar has put in Parts 1 and 2 of a classic Sornette bubble formation since its 2011 low.

Part 1 leads up to a lumpy sideways move I call the “Lumpy Top.”

Then Part 2 is usually a melt-up that tops with a triangle or other topping pattern and retraces to the Lumpy Top.

Then you often (though not always) see a Part 3, which is the biggest, fastest part of the bubble move, and the one that everyone ends up calling a bubble.

The DX has already put in a Neely trend change signal.  It’s likely completing a topping triangle up here before a plunge to the lumpy top and a surge into a Part 3 melt-up.

XLE Big Decision Point Coming

XLE is About to Break Out Downwards from its Rising Megaphone Top (Red) Back to VWAP of its Blue Bottoming Megaphone

XLE is About to Break Out Downwards from its Rising Megaphone Top (Red) Back to VWAP of its Blue Bottoming Megaphone

XLE is about to complete a classic rising megaphone top (red on chart above) across the top of a bottoming megaphone (bright blue) it formed in late 2008 and early 2009.

In normal times, XLE would have made a small head and shoulders or little sideways megaphone at its bright blue megaphone top back in June of 2009 (or, at the latest, in October of 2009).  It might have taken a week or two, and then the price would have plunged back to VWAP to start a new megaphone there.

Instead, XLE got sucked into a multi-year rising megaphone top (red on chart) across the bright blue megaphone top.

A rising megaphone is essentially a Sornette bubble formation.

Note that XLE has been forming a small rising wedge (gray) at the retrace target for the final rising wedge pattern within the red rising megaphone pattern.  That’s a classic little H&S right shoulder continuation pattern.

The target of the coming correction is the VWAP of the bright blue megaphone (horizontal bright blue line).  XLE would usually start a new megaphone there while waiting for the next bubble to develop.

XLE Coming Bubble

XLE Coming Bubble

XLE Alternate Scenario

I think oil is about to head down to a new low within a bottoming megaphone, so I do expect the scenarios above to unfold in XLE.  The scenarios above are probably a 3 or 4 to 1 favorite over the alternate scenario below.

In other words, I believe oil will be heading down with the dollar in a “recovery off” overall trading scenario.

However, I can’t at the moment rule out a possible dollar-down-oil-up scenario, and that would put XLE into the scenario below.

XLE Alternate Scenario

XLE Alternate Scenario

The tell on this scenario is that XLE would make a fake breakout through the bottom of its red rising megaphone, then break back into the megaphone and take out the high of the gray rising wedge it’s forming now.

That would set in motion the purple rising megaphone extension on the red rising megaphone.

The 10-Year Thinks It’s In a Triangle, But It’s Not – Buy Coming Dip

The Ten Year Thinks It's Forming a Triangle (Blue Top) But It's Not - Buy Dip for Breakout to Rising Megaphone Top & New High

The Ten Year Thinks It’s Forming a Triangle (Blue Top) but It’s Not – Buy Dip for Breakout to Purple Rising Megaphone Top & New High

The 10-year t-note keeps tapping at its potential triangle top (blue) but it’s not forming a triangle.

It’s forming a rising megaphone top (purple) on a megaphone (red) within a larger topping pattern.  The purple rising megaphone is about to enter a melt-up wave.

This purple rising megaphone top is likely to top with a rising megaphone of its own, so the 10-year is likely going not only to a new all-time high, but it will likely just keep extending upwards as it forms a top up there.

And that top will likely not be the final top, but there should be a significant retrace before that.

IBB Topping Scenarios

IBB Rising Megaphone Top on Rising Megaphone Top on Rising Megaphone Top has Started Topping

IBB Rising Megaphone Top on Rising Megaphone Top on Rising Megaphone Top has Started Topping

IBB started a rising megaphone top (gray on chart) back in 2013. Then it formed an interior rising megaphone top (pink) and for a topping pattern on that, has put in a rising megaphone top (blue on chart).

Now the blue rising megaphone has started forming a top.

The key to how the IBB top on the blue rising megaphone will go is whether IBB breaks the pink formation’s top decisively before a new high.

A new high first would mean another rising megaphone, probably to the top of the gray rising megaphone.  That would be about as far as a bubble can go.

A decisive break of the pink rising megaphone top would mean a more conventional sideways move to the gray megaphone bottom is in progress before a breakout downward from that with a minimum target of roughly 162.

Odds are high that we get the green scenario, but it’s not a lock.  Within the green scenario, if it happens, we should see a higher high than the existing high, and that should be The Top.

If you see a new high before a retest of the pink formation top, you should buy at the pink formation top for a run through the gray formation top.

Looking for a Set-Up for a 121+ Point Flash Crash

Trend Change Signal Requires a Flash Crash

Glenn Neely has written about what he calls a “well-established concept” of his Neowave system that the beginning of a trend change is marked by a move in the new direction bigger and faster than any previous move in that direction since the start of the existing trend.

I like and recommend Neely’s book.  I’ve never back tested this concept.  But I’ve back tested other Neely rules and set-ups and I’ve found them in general to be money-makers.

In any case, in the present situation, with a market that has been trending up since early 2009, according to Neely’s concept we’d know a bear market had started if we saw a single candle down on the SPX or SPY or ES daily bigger and faster than any other single candle down on those charts since the March 6, 2009 low.

The biggest, fastest decline since the 2009 low was the May 6, 2010 flash crash, in which SPY dropped 12 points and the SPX and ES roughly 120 points.

So, if we come upon a trading set-up with a likely target more than 12 points below on SPY (or 120ish points below on the SPX or ES) the set-up has the potential of not only being a crash set-up, but also the start of a much bigger bear market correction.

On the other hand, if ES dropped 121 points, but it took eight days for the price to travel that distance, it would not meet Neely’s time rule.  Basically, the price has to break out and crash 121+ points in less than a day in this spot.

One of the great things about the Neely rule is that a crash of 121+ points would mean The Top was in.  You wouldn’t have to worry about a topping formation putting in a higher high.

Components of Good Crash Set-Ups

You tend to get crashes of the type that would meet Neely’s requirements in very obvious triangles or megaphones or head and shoulders patterns or price channels or other clear trading ranges.  For example, if everyone is positioned for a triangle to break out upwards, but instead the breakout fails and the price heads back down into the triangle, the price would often melt down to the obvious target of the triangle bottom.

Not only are a lot of people positioned wrong in that type of set-up, leading to a melt-down as they scramble to get out, but nobody else wants to buy into the scramble before the price reaches the obvious target.

And if the price then broke out of the triangle bottom, and there was an obvious potential head and shoulders on the chart with a neckline far below, the price would often melt down to the H&S neckline.

Crashes happen when there’s no bid and market-makers are accumulating unwanted inventory.  Market-makers start taking the price down faster and in bigger leaps trying to entice someone else to step in and bid into all the selling.  If there’s an obvious target below, the entire market tends to wait for it, so the market-makers tend to melt the price down to that target.  Then other buyers will usually step in, if only to close out shorts for an expected rally.

And that’s how you get a crash.

SPY and ES Have a Potential Crash Set-Up On Their Charts Now

SPY and ES have beautiful potential crash set-ups on their charts right now that have the potential to meet the requirements of the Neely trend-change signal.

Here are the details of the set-ups.  There are more set-ups than I can easily write about in a single post, so I’m going to focus on just a few.

SPY Long-Term Rising Megaphone (Orange), Rising Wedge (Bright Blue), and Price Channel (Bright Blue)

SPY Long-Term Price Channel (Bright Blue)

1. Obvious Price Channel Requires Trip to Bottom Roughly 140 Points Below

SPY and ES have a long-term price channel on their charts (bright blue on chart above).  SPY and ES are in their critical decision waves within this price channel.  That means they are in the wave where they either break out through the top to set up a blow-off move into a series of steeper channels, or they quickly return to the channel bottom to continue the move up the channel, or they start forming the top for the entire channeled move.

A breakout through the top for a move into a series of steeper channels usually happens quickly upon reaching the top.  In these cases, an obvious price channel can’t contain the force of the move up.

But that didn’t happen in this case.  Instead ES and SPY have touched the top three times since late November 2014, then tried again to touch it and failed.  That means a breakout upwards from the channel is extremely unlikely.

ES and SPY also failed to turn quickly at the top for a standard dip to the bottom to continue the price move up the channel.

That means we’re likely in scenario three, which means ES and SPY are likely forming The Top for the entire channeled move.

2. H&S in Major Rising Megaphone Top Targets Neckline 140 Points Below

Purple Rising Megaphone Top on Orange Rising Megaphone is Complete Except for H&S to Bottom Before Breakout

Purple Rising Megaphone Top on Orange Rising Megaphone is Complete Except for H&S to Take Price to Bottom Before Breakout

ES and SPY have been forming a rising megaphone (orange on chart above) since 2010.  Rising megaphones are essentially Sornette bubble formations.

To complete, rising megaphones either break out the top to form a smaller topping pattern, or they tag the top on the final wave up and then form an internal topping pattern (usually a head and shoulders or megaphone) that works the price sideways before the breakout downwards.

You often see a rising megaphone top on a rising megaphone, and that’s what we got on the ES and SPY charts (purple in chart above).

Since putting in its 3rd and final wave to the top, the purple rising megaphone has been working on an interior head and shoulders or megaphone.  Again, this type of top tends to work the price sideways to the formation bottom for breakout.

ES and SPY are likely in the head of that head and shoulders right now, completing a topping formation on the head before a plunge to the neckline roughly 137 points below.

Then you could expect a right shoulder before a plunge to the purple megaphone VWAP at ES 1800/SPY 180, which would set up a still larger head and shoulders pattern.

3. ES Triangle Likely to Break Out Downwards

ES Red Triangle

ES Red Triangle

ES has been forming a triangle since late February (the bottom line of the triangle connects to the February 9 bottom of a small retrace).

Usually a triangle in this spot would break out upwards, often to put in the head of a smaller head and shoulders, with a traditional triangle target roughly 80 points higher.

And I do expect this one to put in a fake breakout upwards that may go as far as putting in a new all-time high.

But there are several tells that this triangle is unlikely to put in a real breakout upwards to anywhere near its technical target.

1. Last Low was an Exact Touch on Triangle Bottom

First, the last touch on the bottom of the triangle was an exact tag of the line.  The exact touch means that turn was created by little-guy technical traders.  Triangles don’t put in real upward breakouts after exact touches on the bottom.

2. Interior Irregularities, Including Rising Wedge to Triangle Top

ES Rising Wedge (Silver) To Triangle Top

ES Rising Wedge (Silver) To Triangle Top

Second, there are numerous irregularities in the internal construction of this triangle.  For one thing, the price is getting to the top only through a series of interior megaphones and interior topping megaphones that I have written about in earlier posts.

That is weird.  It should not take megaphone whipsaws and stop runs to get a price back to the top at this point in an obvious triangle.  At this point, the price should have melted up straight from the bottom to the top (and through it).

Plus, all of the megaphones that went into the price rise to the triangle top require retraces.  There can be no genuine breakout from this triangle while it requires retraces for interior megaphones.

In some cases, the likely target for an interior megaphone retrace is the megaphone bottom, and it is already outside the bottom of the triangle.

ES has also put in a rising wedge (silver on chart) on this trip to the megaphone top.  A rising wedge is a topping pattern.  It represents selling into buying–a pro move.

In a normal triangle, all the selling would come from little-guy traders up near the formation top.

These are all traits of topping triangles.

Topping triangles put in fake upwards breakouts before a genuine downward breakout.  If we don’t see a small breakout through the top of the triangle here, we will likely see another move to the bottom, then one more move to the top to put in the fake breakout.

And the triangle could continue past that.  Basically, the longer the price stays in this triangle, the more likely it is to break out downwards.

 

End of Week Leaves Market Poised for New Major Sornette Bubble Set-Up

ES Formed a Triangle (Pink) at End of Day

ES Formed a Triangle (Pink) at End of Day

ES ended the week forming a triangle. If it breaks out downwards, that triangle would be the top of a head and shoulders top at the navy blue megaphone top. If it breaks out upwards, it’s likely going to form a bigger head.

It turns out that the Eurogroup agreement continues to suck for Greece, but it was great for a short squeeze.

ES would usually retrace to at least the navy megaphone VWAP here.  Then it would be legal for a breakout upwards.

It could also go for the megaphone bottom to set up a breakout downwards.

An upward breakout from the navy blue megaphone would set up the green scenario on the chart below:

ES Long-Term Scenarios

ES Long-Term Scenarios

Essentially the green scenario represents Grexit fears put aside for long enough for the market to put in a blow-off top with the help of ECB QE.  That is now the scenario with the highest odds.

The green scenario would also be a classic Sornette bubble set-up launching into the melt-up phase, with the lumpy top occuring in summer of 2014 through October 15, 2014, the first bobble at the subsequent touch on the price channel top and subsequent dip, and ES heading into the second bobble now.  A new high after the second bobble is the set-up to bet the bubble.

It’s also a classic price-channel set-up–a breakout into a melt-up channel.

The purple and orange scenarios would be launched by a downward breakout from the navy blue megaphone.  If we’re going to see the purple scenario (a new high within the 3-year price channel after the dip to the channel bottom) we’ll see a megaphone bottom form at the price channel bottom.  This megaphone will likely break the price out of the price channel a time or two before heading up to a new high.

Update:  Here’s the classic Sornette bubble set-up (below), highlighted.

Classic Bubble Set-Up

Classic Bubble Set-Up