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.

ES Closing in on Triple Witching Scenario

ES Could Still Put in a Lower Low, But It's Closing in On Take-Off

ES Could Still Put in a Lower Low, But It’s Closing in On Take-Off

ES is closing in on its triple-witching takeoff. The target is a squeaker of a new high, then right back down to the low for this move.  This is just a standard triple witching set of moves.  I think these moves will end up turning into a triangle (an E-waver B wave) before a C wave through the top of the 3-year price channel.

The scenario as drawn could have complications in real life.  For example, ES is taking out yesterday’s low as I type this, putting in another bottoming megaphone within the bottoming megaphone on the chart.

ES could also put in a double wave down to a lower low for the retest of the top of the gray wedge after breakout.

ES should fulfill every requirement of the bottoming megaphones within megaphones on the chart, plus the falling wedge and falling megaphone, as it makes this move up.

Trading Notes (Updated)

Be sure to see the updated short-term megaphone scenario in the post directly below.

Note that the huge volume bar was selling into the buying at the breakout to another new high.  Shortly after, volume has fallen off again.

They’ll probably let it drift up again for a bit, but they’ll need to get shorts back in the game and stop out the new longs or they won’t be able to squeeze the shorts to another new high that the stopped-out longs will again have to buy.  They need that technical buying again to continue to sell into.

Update 8:04 a.m. Pacific Time:  This little megaphone could top here or retrace to VWAP and go up to the top of its parent megaphone.  It could even go straight to the top of the parent megaphone without the retrace to VWAP.  It could spend the rest of the day doing something like that.

Here’s a chart:

ES Megaphone Progress

ES Megaphone Progress

One principle to keep in mind is that the bigger this megaphone wave up, the bigger the next megaphone wave down.

Also, to swing the price in the larger megaphone down to the first major correction target of 1900ish, you’d expect the blue megaphone to cover pretty much the whole territory befween 1952.50 and 2000ish first (SPY 195.75 and 200.50).

Note that TRIN for today is actually bearish as I type this, despite the move up.

A Friend Asks What Would Turn Me Bearish

If a Topping Formation Formed Here, I'd Turn Bearish

If a Topping Formation Formed Here, I’d Turn Bearish

A friend who’s a smart trader wrote to tell me that he’d turned bearish because of various indicators, especially related to sentiment.

You’ve probably noticed that I don’t talk much about sentiment.  I don’t care much about sentiment indicators at any time, because they’re not a good guide for timing an entry into a highly-leveraged futures trade.  But I especially don’t care much about sentiment when liquidity is abundant and there’s a Sornette bubble formation on the chart.  Before a Sornette bubble completes, I expect to see deranged sentiment for a deranged length of time.  So mere extreme sentiment is not a good way of timing when to exit a bubble move.

What I do care about is what the price action shows me about what big money is actually doing, and as of this moment, I see nothing bearish in the price action.

Continue reading

Trading Note on the Strategic Beauty of a Wild Megaphone

The strategic beauty of a wild megaphone lies in the fact that it will convince traders to step aside and wait to clear the range to go long. I’m already seeing tweets advising traders to wait for a breakout.

But right after the price clears the range, there’s another megaphone top.

In the smackdown to that megaphone VWAP, another round of stops will be eaten.

And so it goes.

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