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.

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.

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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.