ES Confirmed End of Part 2 of Sornette Bubble Overnight

They Took ES Down Through 1897 & 2-Year+ Rising Wedge Bottom Overnight

They Took ES Down Through 1897 & 2-Year+ Rising Wedge Bottom Overnight

They took ES down as expected through its critical 1897 level last night.  That means this correction was bigger than the last significant correction, and that means the Sornette bubble is in the middle of a 4-6 month topping pattern.

They also took ES through the bottom of its 2-year+ rising wedge in a brief fake breakout that got bought.

ES is now back at the VWAP of its gray bottoming megaphone.

The reentry into the 2-year+ rising wedge after the fake breakout was a set-up to get long.  But they may take it down one more time to give SPY a fake breakout and complete a falling wedge on ES (green scenario on chart).  Then you could go long on an upward breakout from the falling wedge.

You can also go long on a breakout through  the highlighted orange trend line on the chart, or on a breakout upwards through the navy blue megaphone VWAP at roughly 1920.

The next wave up could top in the ES 1950-1965/SPY 195-196.80 area or it could go all the way to one final new all-time high. Either would meet the rules of everything going on in the chart.  I like the new all-time high scenario only because it makes sense in poker terms.  There’s a short-squeeze there for the taking, big money still needs to complete switching sides, and I think they’ll go for it.

We should see this wave up cling pretty tightly to the bottom of the 2-year+ rising wedge and we would usually see a couple more false breakouts through that wedge bottom before the real one.

SPY & ES Stop and Potential Melt-Up Set-Up

If ES Stays Above Yesterday's Navy Blue Megaphone VWAP, It's Setting Up a Melt-Up

If ES Stays Above the Navy Blue Megaphone VWAP, It’s Setting Up a Melt-Up

If ES avoids breaking down through the VWAP of yesterday’s megaphone (navy blue on chart), it’s likely setting up a rising megaphone melt-up to complete the move up from the April 13 low (green scenario).

That would mean a melt-up to the top of the gray megaphone, large orange megaphone, and dark blue rising megaphone. The move would complete all mandatory retraces on the chart.

If ES breaks down through the navy megaphone VWAP, it’s going for the navy megaphone bottom and VWAP of the red bottoming megaphone (lavender scenario).

If the green scenario occurs, you want to exit longs on a topping pattern up there unless you’re trading something like a 401k where the number of trades is restricted, or you just don’t like to play short-term moves. The move down out of rising wedge tops is usually a crash, and this could be the start of the Big One.

However, odds are that this will still not be the Big One, and trend traders will be able to get out not far down even if the Big One is confirmed.

Sornette Bubble Update

ES is at Top of Silver Bottoming Megaphone

ES is at Top of Silver Bottoming Megaphone

ES is at the top of its silver bottoming megaphone. It may break out here. It may need a retrace to VWAP before an upward breakout. (There’s an ambiguous retrace in the formation.) Or it may go all the way for the megaphone bottom again before breaking out upwards.

It could even break out downwards, but I’m pretty sure it will break out upwards to go for its mandatory retrace to the ES and SPY topping megaphone VWAPs.

You’ll know it’s complete and breaking out upwards when the price gets through the navy blue megaphone VWAP.

Assuming it breaks out upwards, it’s what happens at the VWAPs of the topping megaphone at the April highs that will be interesting.

ES & SPY Decision Point Coming at Level of Right Shoulder Top

ES & SPY Decision Point Coming at Level of Right Shoulder Top

John Hussman posted back in mid January that the SPX had reached singularity, or the point in its Sornette bubble formation where it was supposed to crash. He was mathematically correct. However, only 60% of Sornette bubbles crash at that point.

The other 40% go on to spend roughly 5-6 months moving sideways, usually forming some kind of topping formation. Some of these topping formations break out downwards. That was the case with the 2011 crash. But some of these topping formations break out upwards for one final big bubble surge.

ES and SPY formed the top of the left shoulder of a potential H&S right around the time the market reached singularity. Now we’re heading into the potential right shoulder, with a mandatory retrace to right about the level the right shoulder should top.

We should see some kind of megaphone or other topping formation up there. If the price breaks out upwards from that formation, the market’s going for the final bubble surge even though there will be some messy retraces after the breakout upwards. If the price breaks out downwards, we are likely headed into a crash.

In terms of the trading formations on the chart, this would represent a 5th wave topping formation at or across the 5-month megaphone VWAP. A downward breakout from that formation would represent a partial 5th wave. That would be a set-up for the SPX to crash through the megaphone bottom.

If the market breaks out upwards, this was a false top or consolidation pattern on the way to the megaphone top at over 2000.

 

Oil Forming Topping Megaphone on Topping Megaphone for Larger Megaphone

Oil is Forming a Topping Megaphone (Purple) on a Topping Megaphone (Orange)

Oil is Forming a Topping Megaphone (Purple) on a Topping Megaphone (Orange)

Oil is forming a topping megaphone (purple) on the topping megaphone (orange) for a 4+-month megaphone (pink on chart).

But even this topping megaphone can break out upwards, so don’t abandon longs or go short unless you actually see the purple megaphone complete and break out downward for a downward megaphone breakout cascade.

For the SPX A Little More Danger – Here’s What I Think is Happening

Es 1-Day Classic Megaphone with Expanded Final Wave

ES 1-Day Classic Megaphone with Expanded Final Wave

As suggested earlier, ES spent the day forming a classic megaphone, with an interior megaphone across VWAP for an expanded final wave.

This megaphone will probably complete with a spike to the top. Then it will retrace to at least the megaphone VWAP. If it reverses upward at VWAP, it will break out and the move up will be explosive. If it makes it downward through VWAP, it’s headed for the megaphone bottom.

Here is the context of today’s megaphone. It is a pain in the neck to describe, but you can see the scenarios and critical areas pretty clearly on the chart.

Crimea Scare Put Some More Scenarios on ES Chart

Crimea Scare Added Some Bearish Scenarios to ES Chart

ES looks like it might be getting bogged down in yet another larger interior megaphone (light pink on chart above) within its 3+-month megaphone (navy blue on chart above). If ES breaks down through roughly the 1840 area (today’s VWAP) again, either that light pink megaphone is forming or the silver H&S false top scenario is forming. (If ES instead reverses upward when it retests the 1840 area, the light bright green scenario on the above chart is in play.)

If the light pink megaphone is forming, ES is most likely forming the top of the third wave of its longer-term navy blue megaphone. In that case, the breakdown through 1840 would be followed quickly by a higher high (grass green scenario in chart above).

ES would then retrace once more to at least the navy blue megaphone VWAP at roughly 1833. It could reverse upwards there for a breakout (orange scenario), and if it does, the move up will be explosive. But if it gets through the 1833 area in this scenario, it’s probably going to the navy megaphone bottom (light blue scenario).

Then you’d usually see a retrace to at least the navy megaphone VWAP, but there is a small possibility of a bigger price drop without seeing that retrace.

If the silver false-top scenario is forming, there will be a downward breakout from today’s megaphone, then a retrace to 1841-1842, another reversal there, and then a move to roughly 1780, where the price would reverse again and lead to much higher highs in a melt-up scenario.

Unless you’re trading a huge position or are limited in the number of trades you can do within a short time period, you might want to limit risk by exiting longs at the top of the light pink megaphone if it forms, or on a downward breakout through the neckline of the H&S in the silver scenario.

I’ll post exit signals for hard-core trend followers if they actually develop.

To summarize, the straight-to-melt-up scenario is still on the charts, but the Crimea scare has added more bearish possibilities.

 

SPY Topping Scenarios

SPY Closes at VWAP of Short-Term Megaphones

SPY Closes at VWAP of Short-Term Megaphones

SPY and ES closed at VWAP of their short-term megaphones. After the regular market close, ES started crossing and recrossing VWAP. That’s what you tend to see when the market is going to form another interior megaphone (orange in chart below).

ES May Be Forming Another Interior Megaphone (Orange, at Right)

ES May Be Forming Another Interior Megaphone (Orange, at Right)

ES is still a favorite (though not guaranteed) to make it to the top of its blue interior megaphone, then back to that megaphone’s VWAP, before making any longer-term decisions about direction.

SPY is a favorite to retest 181 only if it gets moving down there pretty quickly. If it starts another megaphone across VWAP, or moves up with ES while ES completes a trip to its blue megaphone top, SPY’s longer-term megaphone VWAP will move up to roughly 183.50 with all the other megaphone VWAPs. That would likely mean a lot more upside before we ever see 181 again.

That would be the SPY parabola scenario.

SPY Parabola Scenario

SPY Parabola Scenario

The other scenario is the SPY head and shoulders scenario. If SPY gets crashing down to 180-181 promptly next week, or if SPY crashes through its 183.50 VWAP area after a trip to the top of its silver megaphone (at roughly the 187 area), SPY is probably going to form a head and shoulders. There’s more than one way this scenario could play out. Here is one of them:

SPY Megaphone/Head and Shoulders Scenario

SPY Megaphone/Head and Shoulders Scenario

This particular scenario would put a long-enough sideways megaphone move on the charts to power a sizable breakout wave.

It would also put a head and shoulders formation on the chart for what would likely be the left shoulder of a larger formation. An upward breakout from that (typically from a right shoulder failure) would lead to a strong price surge suitable for completing a Sornette bubble formation. When you look at lots of charts of Sornette bubbles, what you frequently see at the end is a maniac melt-up into the head of a head and shoulders formation. This type of H&S is characterized by small left and right shoulders relative to the size of the head.

A standard downward breakout from the purple megaphone would also work to complete a topping formation, but the odds of this scenario are lower because the Dow has some unfinished business on its long-term chart.

I’m long unless SPY breaks out downwards through its short-term megaphone VWAP level (or downwards out of a megaphone that forms across that VWAP level).

My main objective at the moment is to avoid excessive risk and ride the potential parabola as far as seems wise.

If instead we get one of the H&S scenarios, my goal is to avoid riding the price down into the left shoulder dip(s), and more important, to get in on an early set-up on that probable melt-up into the head and final top before a significant correction.

 

Market Bubble Update

Hussman's December 30 Sornette Bubble Chart Update

Hussman’s December 30 Sornette Bubble Chart Update

This chart is John Hussman’s December 30 Sornette bubble chart update. As you can see, corrections would be expected to be frequent but small at this point, and consistently getting smaller. When you see a correction bigger than it should be in terms of the size of other recent corrections, you know the topping process has started.

Often that first warning dip completes the left shoulder of a head and shoulders formation, and leads to a manic vertical move into the formation head (silver, for example, had a terrific move into the head of its topping formation in 2011).

Other times, you don’t get the warning dip. Instead the market completes a classic, though strung-out, ending diagonal, and you short the breakout.

Sornette explains in Why Stock Markets Crash that the underlying reason for the increasing rate of price rise at this point in a bubble is to compensate traders for the dramatic increase in risk incurred in staying or getting long.

The Dow has not completed its long-term formations yet.

The Dow Needs More Upside to Complete Its Long-Term Formations

The Dow Needs More Upside to Complete Its Long-Term Formations

The Dow has completed its mandatory breakout from its decade+ megaphone (orange on chart), but still has to break out of its 2+-year rising wedge (purple) and its 4-year rising megaphone (blue) to complete its long-term formations.

Pay Attention to Short-Term Megaphone on ES (Updated)

ES Is Forming Another Short-Term Megaphone

ES Is Forming Another Short-Term Megaphone

The E-mini has been forming another short-term megaphone (pink on chart above) since the day after Christmas.

A downward breakout after a retrace to the megaphone VWAP would suggest a correction to at least the VWAP of the next larger megaphone (navy blue on chart below) at roughly 1775 and possibly the larger megaphone bottom at the 1730-1740 area.

ES Next Larger Megaphone is Key to Whether Sornette Bubble is Still On

ES Next Larger Megaphone is Key to Whether Sornette Bubble is Still On

A correction to the navy blue megaphone VWAP area at roughly 1775 would be very healthy if the price reverses there and breaks out the navy megaphone top. That would signify that the Sornette bubble formation is alive and well.

But if the price breaks down through that navy VWAP area to the megaphone bottom, it would be a signal that the Sornette bubble scenario is off and that it’s time to be looking for an exit and a set-up to short.

There are three VWAP areas in the ES navy blue megaphone (it’s a little different in SPY—I’ll post about SPY later). These would probably move and perhaps coalesce on a correction to the megaphone bottom, but I estimate that we’d see a move up to something like an 1800 VWAP area before a breakout through the megaphone bottom and a larger correction or protracted large sideways move.

A protracted large sideways move would probably be a head and shoulders formation in which each shoulder and the head forms its own H&S. The ES would be working on the left shoulder now.

Update: The low before the retrace to the short-term (pink) VWAP may be in, or the price may twine around the pink megaphone bottom for a while before the retrace and put in a lower low. But there must be a retrace to at least the megaphone VWAP before the megaphone can complete and a downward breakout from the megaphone can occur.