Back at VWAP and Looking for a Way to New Highs

False Breaks Usually Mean an Extension

ES is Back Outside of its Navy Blue Megaphone Top Trying to Extend the Orange Rising Megaphone

ES is Back Outside of its Navy Blue Megaphone Top Trying to Extend the Orange Rising Megaphone

ES is back outside of its navy blue megaphone top and back inside its orange rising megaphone bottom after false breaks through both.  That would usually mean ES wants to extend the orange rising megaphone and put a bigger top on the navy blue megaphone.

A new high would confirm that the orange rising megaphone is an interior rising megaphone within the gray rising megaphone.

The green scenario on the chart above is more likely than the purple scenario.  The green scenario could take the price a lot higher than drawn.  The purple scenario is one of several possible ways ES could twine across the navy blue megaphone top for an extended time.

I’ve seen prices twine up a major megaphone top for months.

But the Extension hasn’t Triggered Yet

ES is Back at its Blue Megaphone VWAP & Looking for a Way to Break Through

ES is Back at its Blue Megaphone VWAP & Looking for a Way to Break Through

But ES has not yet broken through its blue megaphone VWAP at 2362 on the 60-minute chart, so technically it’s not yet set up for a move to a new all-time high or a twining move.  We could see a small pullback from VWAP to put a right shoulder on an inverse H&S (green scenario).  Or we could see a move down to retest the low and put a double bottom on an inverse H&S (orange scenario).

Or we could see ES put in a Sornette melt-up set-up at the blue megaphone VWAP (pink scenario).  We could even see a failure to break out through 2362 and collapse (not drawn, because it’s unlikely).

Assuming ES breaks out upwards through 2362 one way or another, the minimum target is the blue megaphone top and the play is to stay long until ES breaks out of the new gray rising megaphone.  The gray rising megaphone bottom doesn’t get officially drawn until ES hits a new all-time high.

A Market that’s Rethinking its Prospects

The market is essentially telling us it doesn’t know what to do.  It had set up a major top for a big correction, and now it is glimpsing the potential of bullish prospects.

It should still retrace to 2150 at some point even if it’s destined to cancel out its major bearish set-ups and head up in a multi-year bull market.

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.

Why Today’s SPY Chart May Mean Taper Off

Today's Price Action on SPY Creates an Inverse Head and Shoulders

Today’s Price Action on SPY Makes Entire Correction an Inverse Head and Shoulders

SPY did everything it was supposed to do today and a lot more.

After yesterday’s probe through the top of SPY’s leading diagonal, a pullback (B wave) was required. Obama delivered it to us, courtesy of his poker game with Putin (in which Obama has totally fucked up his hand). But the pullback we got was a lot deeper than it should have been (based on the E-mini’s price channel action). This kind of anomaly usually means a change in the broader picture.

With today’s price action, SPY has now set up its entire correction from the August high as an inverse head and shoulders formation, which is exactly what it would do if Bernanke were putting out the word that the Fed had been kidding about a September taper (or something else equally bullish were happening).

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What They Taught Me at the CBOE

My father was a market maker in the early years of the Chicago Board Options Exchange, and I worked there for a summer.

The first thing a trader there taught me was that the percentage of the public that wins on options trades was so small that it was for all practical purposes indistinguishable from zero.

We went into today with a relatively high put-call ratio on QQQ and a middling ambiguous ratio on SPY. You can’t be sure what that means exactly, because maybe a lot of people bought puts yesterday that don’t expire until next month. The simple ratio doesn’t give us that kind of data.

But it’s likely that there are now a relatively large number of SPY puts that have to be closed out this week. Owners of calls have given up on a breakout to a new high before expiration, and bears are getting emboldened.

A perfect next move for SPY during opex would be to take the price up to a new high in a rising wedge (or ending diagonal) formation, then dip back to retest the 50-, 40- and 20-day moving averages massed below. Not sure on the exact timing of the retest. The price action suggests something like this—I’ll post a chart after the close.

Note: Earlier stupid typos corrected.