Gold Overnight Surge

Gold Surged to its Megaphone Top While ES Surged to its Megaphone Bottom

Gold Surged to its Megaphone Top While ES Surged to its Megaphone Bottom

Gold is legal for an upward breakout from its pink megaphone with a target of roughly 1375 (a topping pattern up there could take it a bit higher).

But a passionate surge (on a Portuguese bank failure) that stops like a dime on the top of a megaphone is always suspect.

Gold is forming a little megaphone up here across the pink megaphone top.  If it breaks out upwards, it’s going for 1375.  If it breaks out downwards, it’s headed for at least its pink megaphone VWAP and likely 1290 at its pink megaphone bottom before carrying out the trip to 1375.

ES Price Channels Overnight & Implications for Blow-Off Top

ES Broke Out  Downwards from its Navy Blue Short-Term Price Channel Overnight

ES Broke Out Downwards from its Navy Blue Short-Term Price Channel Overnight

ES broke out downwards from its navy blue short-term price channel overnight.  The next target is the bottom of its longer-term price channel (green or purple scenarios on chart).

That channel could be either the bright blue or the orange one on the chart.  It’s a roll-up channel from a less-steep channel and the rules would allow either channel.  However, odds are higher that ES is going for the bottom of the orange channel.  A trip to the orange channel bottom here would also be a retest of a multi-megaphone VWAP area, and make ES legal for an upward breakout from all those megaphones.

If ES gets through that orange channel bottom, it will almost certainly be in the context of forming a new megaphone right shoulder for the potential head and shoulders on the chart.  Megaphone right shoulders almost always lead to upward breakouts from H&S patterns.  They are great for whipsawing small traders, and we’ve been seeing a lot of them.

A stop at one of those channel bottoms would imply a blow-off top that’s gathering speed for the fastest, steepest part of its move.

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SPY and ES May Already Be in Blow-Off Top

ES has Set Up a Steeper Price Channel (Purple) and has no Requirement for a Dip

ES has Set Up a Steeper Price Channel (Purple) and has no Requirement for a Dip

ES has now moved sideways long enough and traveled far enough out of its gray price channel that it appears to have rolled up into a new steeper price channel (purple on chart). You can find the rules for rolling price channels in John Murphy’s Technical Analysis of the Financial Markets.

It could have accomplished the same thing with a dip into the gray channel that failed to make it to the bottom. But now no dip is required.  All existing megaphone requirements have been met, so there’s no requirement for a dip there either.

If the new purple channel doesn’t hold on the Non-Farm Payrolls report, we’ll likely get the dip and possibly a different steeper price channel. But for now my operating assumption is that ES and SPY have already begun the blow-off top I talked about in A Scenario to Pray For.

Since we’ve never had a topping formation complete and break out downwards, you should still be long from the falling wedge breakout and Sornette bubble set-up at the May 20 low. But if you’re not long, wait for the NFP report. If the new purple price channel holds, get long.  If the purple channel fails, wait.  I’ll post a set-up either way.

The fundamentals of this move are that Draghi just set up an incentive for capital flows into the U.S. markets with his move to negative interest rates and the rest.  You need capital flows to get a proper Sornette bubble blow-off top.

Macro Liquidity Indicator Melts Up to New High

Fed Liquidity Flows Moved Up to a New High Last Week

Fed Liquidity Flows Moved Up to a New High Last Week (Chart by Lee Adler)

Lee Adler of the Wall Street Examiner web site has documented in his new macro liquidity chart that Fed liquidity flows rushed to keep up with the stock market last week.

The market doesn’t seem to like sideways moves in that dark blue macro liquidity line, but it looks like the most recent pause is now behind us.

ES Reaction to NFP (Updated)

ES Moved to Top of Topping Megaphone (Small Blue Gray) on NFP

ES Moved to Top of Topping Megaphone (Small Blue Gray) on NFP

ES has moved to the top of its topping megaphone on the Nonfarm Payrolls report. It has to break out a little and form a topping formation at or across the top, then head down into the expected dip.

The topping pattern at the top of the formation can form quickly or drag on and on.

The rule of thumb is to wait for it to complete and bet the breakout downwards after a wave up in the formation that ends at its VWAP.

Update: If ES breaks out upwards from that megaphone after a wave down that reverses at its VWAP, it’s going for the top of the dark gray megaphone in the chart below, and will carry out the dip for both the silver and gray megaphones at the same time.

If ES Breaks Out Upwards, It's Going for Dark Gray Megaphone Top Before Dip

If ES Breaks Out Upwards from Blue-Gray Megaphone, It’s Going for Dark Gray Megaphone Top Before Dip

That’s unusual when the megaphone tops are this far apart, but it happens so don’t get thrown by it. We will still see the dip to the silver and dark gray megaphone VWAPs.

After the dip, ES will have further up to go to the tops of its longer-term megaphones.

ES Must Get to the Top of its Longest-Term Megaphones to Complete Move

ES Must Get to the Top of its Longest-Term Megaphones to Complete Move

A Sornette Bubble in Valuation Metrics

Hussman's Chart of Valuation Metrics Shows a Clear Sornette Bubble Pattern

Hussman’s Chart of Valuation Metrics Shows a Clear Sornette Bubble Pattern (h/t Hussman Funds)

Sornette bubble formations tend to develop in three parts—a fast but zigzaggy rise to a lumpy top and significant retrace, a faster more classic bubble rise into a parabolic top and crash, and a second, even faster rise into an even bigger parabolic top.

The three parts together can be considered a rising megaphone formation.

In the chart above, John Hussman provides a graph of S&P 500 valuation metrics that have a very high correlation with subsequent 10-year market total return. He’s showing that at current levels, the S&P 500 is more than 100% above levels that have historically provided a normal return in the subsequent 10 years.

I’m always interested in Hussman’s thoughts on value, but what’s most interesting to me about the chart is that the valuation metrics have formed a clear three-part Sornette bubble pattern, with the market currently about half way into the final, fastest, biggest bubble wave (my green scenario). The target for this final wave would be valuations more than 300% above levels that have historically provided a normal return in the following decade.

I doubt Hussman would agree with this application of his chart. But because this pattern of over-valuation (by historical norms) has developed, I think it’s highly likely that valuations will get that extreme by the time this bull run is over. In other words, whatever has caused this pattern to develop is highly likely to run its course.

The only thing to keep in mind is that valuations can get to the target level without prices moving up with them. For example, prices could start moving sideways while earnings started to fall.

 

SPY’s “Ukraine Retreat” Came When SPY Hit Top of 2-Year Rising Wedge

SPY's "Ukraine Retreat" Started Precisely When SPY Reached the Top of its 2-Year Navy Blue Rising Wedge

SPY’s “Ukraine Retreat” Started Precisely When SPY Reached the Top of its 2-Year Navy Blue Rising Wedge

SPY’s Ukraine plunge occurred precisely when SPY reached the top of its 2-year rising wedge (navy blue in chart above).

A rising wedge never completes with a precise touch on the top.

SPY’s Ukraine dip took the price back to a retest of the breakout past the Feb. 19th high, where volume surged as buyers bought into the continued selling. The buyers beat back the sellers to a new closing high.

But we could still see the bears make another attempt at an H&S formation here with a neckline at the much-pounded multi-VWAP area.

Bears Could Still Set Up an H&S Here, But in a Sornette Bubble Formation You'd Expect It to Break Out Upwards

Bears Could Still Set Up an H&S Here, But in a Sornette Bubble Formation You’d Expect It to Break Out Upwards

In Sornette bubble formations, topping patterns tend to break out upwards, so the green scenario in the chart above is the more likely one. Nevertheless, if you should see the lavender scenario with a breakout through the H&S neckline, the targets are still the megaphone bottoms, where you’d be looking for a bottoming pattern from which to buy an upward breakout.

SPY’s upward target remains a breakout through the top of its 3-month megaphone (purple on chart below), which gets higher all the while SPY moves sideways here. A spike to that target would be followed by another retrace to the multi-VWAP area.

SPY's Upward Target Remains the 3-Month Purple Megaphone Top

SPY’s Upward Target Remains the 3-Month Purple Megaphone Top

Here are the possible scenarios on a longer-term chart. This chart shows how the potential H&S correction to the old VWAP would also likely be a retest of the rising-wedge bottom.

SPY Longer-Term Scenarios

SPY Longer-Term Scenarios

In megaphone 5th waves (which is what I believe SPY is in now) you frequently see false tops at roughly the level of the previous touch on the top of the formation. The false tops often lead to retraces to the megaphone VWAP (which is currently at the multi-VWAP area) or, if that VWAP has recently moved up, to an earlier important VWAP level (the silver line on the chart above).

But the false top doesn’t have to complete.

Whether we get the false top or not, megaphone 5th waves typically complete with a spike through the top.

By the way, TRIN got beaten back from a MACD crossing today.

TRIN Tried For and Failed At a MACD Crossing Today

TRIN Tried For and Failed At a MACD Crossing Today