QQQ Neely Signal

Biggest One-Day Slide Since August 2015 Suggests Deep Retrace of Move

On Friday QQQ Put In Its Biggest 1-Day Slide Since August 24, 2015 - That's a Neely Signal

On Friday QQQ Put In Its Biggest 1-Day Slide Since August 24, 2015 – That’s a Neely Signal

On Friday QQQ slid 5.79 points from the day’s high to low. That is the biggest one-day slide since August 24, 2015 (the capitulation move of the China bubble crash). That is a Neely signal that the move out of the August 24, 2015 low has just ended.

That suggests QQQ has started a deep retrace of that move. However, unless QQQ crashes more than 9.50 points on Monday, it suggests QQQ has higher to go after a partial retrace of that move.

QQQ reentered its pink rising wedge Friday and ended the day with a retest of its top.  It’s likely to continue down to the rising wedge bottom and beyond to at least the orange megaphone VWAP and the bottom of the silver rising megaphone.

That will be a critical decision point.

Critical Decision Point will be at 105-106ish

QQQ could reverse hard at the silver rising megaphone bottom for a breakout upwards from the orange and light blue megaphones and the silver rising megaphone into a truly magnificent move up with a target of roughly 200 (green scenario).

Or QQQ could start a megaphone there (purple scenario) that breaks the price out of the silver rising megaphone to set up a new rising megaphone (red on chart).  That would imply a new all-time high within the light blue megaphone and red rising megaphone, but not a move to 200.  Instead, QQQ would likely be putting in a double wave up within the light blue megaphone and setting up a swing to its bottom.

The Larger Crash Scenario

If QQQ is going to put in a candle larger than 9.50 points on the correction to 105-106ish, it will likely do so as part of a price channel crash set-up that takes QQQ straight to the light blue megaphone bottom before another swing to its top.

The Bots

Studies show that high-frequency trading bots tend to suppress volatility. I don’t have enough data to know how this affects things like the Neely signal.

So even though this signal back tested well for decades, keep an open mind about the possibility of a megaphone starting here rather than an immediate correction.

The Price Action to Watch For

However, the price action usually won’t lie.  If the market’s heading down from here to 105-106ish or beyond, the move would usually start as a price channel.  In the critical decision wave, we’d usually see either a conventional breakout into a series of melt-down channels, or we’d see a large falling megaphone bottom start.

Large falling megaphone bottoms tend to break out of a price channel like a conventional melt-down set-up, then retrace all the way to the price channel top, then break down out of the channel past the first channel breakout.

Either could reverse at 105-106ish, but a falling megaphone would be a tell that a reversal there is a strong favorite.

Plug for a Friend’s Fiction Site

My blackjack team partner, Arnold Snyder, publishes a fiction website at Write-aholic.com. The site has reviews of novels and Arnold’s own fiction.  If you like fiction, I think you’ll like the site.

He wrote one of my favorite short stories, Finding God on LSD (A Short Story About Schizophrenia) and is now publishing online a series of short novels he calls Smut4Nerds.  Hilarious.

He also wrote Risk of Ruin, which I happen to like a lot. It’s a novel about an antisocial profession gambler/biker who ignores the odds and takes up with a stripper who believes she’s God.

Oil Update

Oil Inverse Head and Shoulders with Megaphone Right Shoulder

Oil Inverse Head and Shoulders with Megaphone Right Shoulder

Oil continues to work on the right shoulder of its inverse head and shoulders bottom (blue neckline).

Oil is working on a megaphone or triangle right shoulder on the formation.  Because the last trip to the bottom of the red megaphone reversed so close to the previous red megaphone low, oil is likely to reverse on this bounce to the megaphone VWAP to put in a lower red megaphone low or even a double bottom for the inverse H&S (green scenario).

If instead oil starts a new megaphone across VWAP, it’s likely forming a triangle right shoulder (purple or orange scenario).

Oil could also put in a Sornette set-up at VWAP for a fast swing back up to the blue neckline before a return to VWAP (not drawn).

Oil could also morph the inverse H&S into a triangle that breaks out downwards into a final low for the correction off the 2012 highs, but that is less likely.

Contango vs Backwardation

Basically, oil is in contango (see post on contango and backwardation), and its happy place right now is 50ish. Goldman is warning that if oil can’t move into backwardation double quick, it’s likely to have a hard move down (green scenario).

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.