Sornette Supercomputer Calls for a Crash

The supercomputer that monitors the stock market for Didier Sornette has diagnosed a bubble in four sectors of the market and has recommended shorting the FANG stocks.

Sornette’s bubble calls result in a crash of at least 20% roughly 60% of the time.  In those cases, the crash reaches its target within two weeks of the bubble call.

The other 40% of the time, the market starts a sideways move that can take months but usually breaks out downwards into a correction of at least 20%.  Occasionally it’s less, like 15%.  It can be a lot more (like the dot-com crash).

Occasionally the sideways move is fast and results in an upwards breakout that extends the bubble.  You can get a few of these extensions (as at the top of the dot-com bubble) before a bigger crash.

QQQ is a Favorite to Put In a H&S with a Triangle Right Shoulder Here (Green Scenario)

QQQ is a Favorite to Put In a H&S with a Triangle Right Shoulder Here (Green Scenario)

QQQ is potentially putting one of the strongest possible topping patterns on its daily chart—a head and shoulders with a triangle right shoulder.  The likelihood of that topping scenario is increased by the big red candle QQQ put in a June 9.  That was a Neely short set-up for a retrace of the move out of the February 2016 low.

QQQ Needs a Retrace to the Bottom of its Light Blue Rising Wedge and Navy Blue Megaphone VWAP

QQQ Needs a Retrace to the Bottom of its Light Blue Rising Wedge and Navy Blue Megaphone VWAP

QQQ needs a serious stab at a retrace to VWAP of its navy blue long-term megaphone, which started forming in July 2014, to be legal for an upwards breakout from the megaphone (green scenario).  That would also retrace the light blue rising wedge.

QQQ could also go all the way for the navy blue megaphone bottom, but the fast topping process in the green scenario would make that scenario less likely.

The purple scenario becomes more likely if QQQ goes for delay and a more extended topping process.  The charts are aligned beautifully with Sornette’s call.

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).

Crash Set-Ups

Neely Crash Call

IWM Megaphone Crash Set-Up

IWM has a Clear Crash Set-Up to the Bottom of its 3-Year+ Red Megaphone

Yesterday I posted that Glenn Neely has put out a public crash warning. He says the only other times he’s had this crash set-up were at the tops in 1987, 2000, 2007 and August 2015.

He said his crash call was based on current wave structure, U.S. margin debt, insider selling, overbought warnings from his Moat Index, a rising interest rate environment and the volume of new accounts being opened at brokerage firms in 2017 around the country.

Neely didn’t mention the collapse in new loans or the recent federal budget surpluses, but I’ve been concerned about those. The crash in new loans suggests a lack of new money formation. And Warren Mosler has written at length about the connection of Bill Clinton’s budget surpluses to the 2000 dotcom crash.

IWM Megaphone Crash Set-Up

And the long-term charts have great technical set-ups for a crash as well.  IWM is working on a top for the pink rising megaphone at the top of its 3-year+ red megaphone.  The red megaphone requires a move to at least VWAP when that top completes.  Neely is calling for a bigger crash, which would mean a move all the way to the red megaphone bottom. That would be the favorite scenario if IWM breaks through the red megaphone top to complete a top on the pink rising megaphone (purple scenario).

Neely is looking for his crash within the next 1-3 months.  IWM needs to work its way across the pink rising megaphone while forming a top, and that’s about how long that process will take.

ES Flat-Bottomed Megaphone Crash Set-Up

ES Flat-Bottomed Megaphone Top

ES has a Flat-Bottomed Megaphone Top on the Long-Term Chart with a Technical Target of 1200ish

ES has a series of rising megaphones in rising megaphones on its long-term chart as well as a huge flat-bottomed megaphone (red), which is also a head and shoulders with a megaphone right shoulder.  A breakout through the neckline at roughly 1800 would target roughly 1200.

Right now ES is working on interior rising megaphones (gray and navy blue) and is likely to complete a head and shoulders inside the bright blue rising megaphone before breakout.  In that case, a breakout from the blue rising megaphone would be a strong set-up to short.

QQQ Crash Set-Up

QQQ Needs a Retrace to its Silver Megaphone VWAP

QQQ Needs a Retrace to its Silver Megaphone VWAP

QQQ not only needs a retrace to VWAP of its silver megaphone, which started forming in June 2005, but also a retrace to its pink and blue rising megaphone bottoms near that VWAP.

It’s also working on the red megaphone and needs a crash to its bottom.

QQQ is working on an extended rising wedge top and is likely to complete a head and shoulders top inside the pink rising megaphone.  A combined breakout from that and the pink rising megaphone would be a strong set-up to short.

Crashes Usually Form Price Channels

A crash usually forms a price channel very close to the start of the crash. So I’ll be posting any price channel melt-down set-ups if we get one.

Better Entries

The heads of H&S tops inside rising megaphones usually form small H&S tops of their own. These are usually a terrific way to get into a crash set-up at the very top. I’ll post them if we get them.

Alternatives to a Crash

Every index has outs on the chart that could avert a crash, though every one requires at least some kind of significant dip soon. If those dips convert into more upward extensions, I’ll post that here.