Rising Megaphone Upward Breakouts

DIA Long-Term Rising Megaphone with Price Channel Set-Ups

DIA Long-Term Rising Megaphone with Price Channel Set-Ups

Yesterday I posted DIA’s rising megaphone with a classic megaphone/head and shoulders topping and retrace scenario (above).

GLD Put in a Classic Top Before Retracing to Its Red Rising Megaphone Bottom

GLD Put in a Classic Top Before Retracing to Its Red Rising Megaphone Bottom

Gold put in a similar top before retracing to its red rising megaphone bottom. If it can break out through the bottom here, it will retrace to the red rising megaphone bottom.

AMZN Broke Out Upwards from its Blue Rising Megaphone

AMZN Broke Out Upwards from its Blue Rising Megaphone into a Rising Wedge

But rising megaphones don’t always complete in the classic way.  There are ways they can extend.  For example, AMZN failed to break out its blue rising megaphone bottom.  Instead it broke out the top and converted a classic head and shoulders top on the rising megaphone into a huge rising wedge top (red).

It will likely form a megaphone up here to complete the rising wedge.  This megaphone could break out in either direction once it completes.

AAPL Extended its Toop on the Blue Rising Megaphone

AAPL Extended its Top on the Blue Rising Megaphone

And AAPL, instead of breaking down through its blue rising megaphone bottom, converted its classic H&S top into a giant rising megaphone top that could extend as well.

These are not the only ways for rising megaphones to extend.  For example, any wave within a rising megaphone can extend to form an interior rising megaphone.  And a rising megaphone can put in a new high after breakout through the bottom, before retracing to its target, under certain conditions.

The point is that every topping formation can break out in either direction and every rising wedge or megaphone can break out in either direction.  There are always ways for moves to extend as the market gets new information that may challenge the assumptions that built a trading formation.

Trading Notes – High Alert

I’m concerned about the effect of options expiration in this spot.

There’s a clear triangle on the ES chart, and normally after an exact touch on the triangle top the price wouldn’t break out the triangle bottom without another move to the top.  And that move would usually pierce the top.

But the triangle top did get pierced today on the SPY daily chart.

And if the market closes tomorrow with SPY and ES near the triangle bottom, the SPY put-call ratio might be so high that the price just keeps on crashing.

If a major move gets started during options expiration week, there tends to be a lot of chasing and unwinding of complex hedges and the move can get a lot bigger a lot faster than it would have gotten outside of opex week.

If you see ES break out of its rising wedge, I’d short and be prepared to stay short if we don’t get a proper bottom at the target areas.  There are a lot of megaphones on the chart, and people are never looking for megaphones.  They’re always looking for head and shoulders patterns.

In particular, if ES gets moving through a critical megaphone VWAP at 2016.50, the next target is 1950 or even straight to 1900.

I’m not saying it’s going to happen.  I’m saying it’s a great time to be on high alert.

Topping Formation Here Would Mean Lower Low Coming

This is a just-in-case post.

If ES forms a little topping pattern here, and completes it and actually breaks out downwards, it would put in a lower low for this move down (see chart below).

If ES Turns Here, It's Still Working on a Falling Megaphone

If ES Turns Here, It’s Still Working on a Falling Megaphone

You would need to redraw the falling megaphone as shown.

But it’s awfully late in the quarter for bears to pull off this move now. ES would have to complete a top, plunge, and complete a bottom at a lower low by tomorrow to meet the normal triple witching pattern, then complete an even larger melt-up by Thursday.

I don’t think there’s enough time.  Also, the falling wedge bottom we saw last week is not usually followed by a lower low of this type.

So the most likely occurrence here is another attempt at a top that fails and keeps the price moving upwards in its triple witching rally.