ES at Top of Megaphone and Top of Rising Megaphone

ES is at the Top of its Navy Blue Topping Megaphone and the Top of a Rising Megaphone Top Within It (Gray)

ES is at the Top of its Navy Blue Topping Megaphone and the Top of a Rising Megaphone Top Within It (Gray)

ES is at the top of its navy blue topping megaphone as well as the top of the gray rising megaphone top within it.  It basically did nothing on the nonfarm payrolls report.

It’s still crawling up the bottom of the price channel Bullethead posted yesterday afternoon (see comments).

It’s forming another even smaller top as I write this. It could be a small megaphone (pink on chart) or it could be another rising megaphone (blue on chart). It’s a hair away from the top of its 6-month megaphone on the daily chart, and it probably wants to get there.  Whatever this top turns out to be will take care of the remaining requirements for the price channel.

The thing that makes me think the market will top sooner rather than later is last week’s double NYMO close over 80. The longest the market has taken to correct after that signal was 13 days.

But you have to wait for a topping pattern to actually complete and break out downwards before you short or even exit longs. For all we know, the NYMO signal will take a new record amount of time. I doubt it, but it’s possible.

Always Wait Wait Wait for a Set-Up

I just want to make sure that everyone gets the concept of waiting for a set-up.

Let’s say you see multiple signals that a top is forming.  You’re seeing divergences.  You’re seeing ridiculous NYMO closing levels.  Bullish sentiment is at an all-time record.  If a major top is forming, you will likely be seeing such signals for weeks or months.

None of that is a set-up to short.  All those kinds of signals can tell you is that you should be paying attention, because the market is closing in on a signal to short.

But you have to wait for the actual signal, which means you have to wait for the price action to tell you not just that big money is selling, but that the selling has reached the point where the market is faltering.

I don’t believe I’ve ever seen a top that didn’t give some kind of simple, classic set-up to short near the top.

Usually when you wait for the actual price action set-up, you miss part of the move.  You exit longs and enter a short position below the tip of the top.

Doesn’t matter.  Who cares?  You’re not even trying to catch the exact top.  You’re trying to maximize return on investment.  That means you’re trying to grow your trading capital at the fastest rate possible for a minimal amount of risk.

That means you’re trying to enter a move not so much at the very earliest possible point, but at the point when the likelihood of a continued sizable move is greatest, and your chances of getting stopped out are minimized.

Rule of Thumb Regarding Triangle Breakouts that Fizzle

A Wedge Breakout that Fails to Head to the Target is Making Another Triangle

E-mini Wedge Breakout that Fails to Move to Target is Making a Different Triangle

A general rule of thumb is that when a triangle breakout of any type (including head-and-shoulders pattern breakouts, wedge breakouts, or megaphone breakouts) fails to move swiftly to the target and instead moves sideways or in the wrong direction, the price is forming another triangle.

Right now, for example, the E-mini price has broken out of an ascending wedge, started down, and then started moving sideways. Now it has moved past the wedge high and stalled out. In a case like this, the sideways move could be a small head and shoulders pattern, which itself can breakout upwards or downwards.

This kind of price action is perfect for HFTs (high frequency trading bots) in low-volume conditions. They hunt stops at the wedge high, then they take the price down to hunt the stops of those who went long at the new breakout. They could also create a head and shoulders pattern, then break it out upwards to collect more stops.

Lots of flux, little to no edge. HFTs tend to get the money at times like these. Best to wait and watch for the next signal for a bigger move.

The goal is not to catch the exact top or bottom of a move, nor even to catch as many moves as possible. It’s to maximize growth of capital for a given level of risk.




Price Action That Would Change the Odds at the 200 dma & Trend Line

A Triangle at a Potential Neckline Would Change the Odds at the 200 dma

A Triangle at a Potential Neckline Would Change the Odds at the 200 dma

You need triangles and/or wedges to reverse a significant move because these formations are the footprint of big money changing sides, and it takes big money changing sides to reverse a significant move.

Assuming the price on the E-mini/SPX makes it back to the potential neckline after having broken out of the bottom of the short-term ascending wedge, a triangle moving sideways there would improve the odds of the price breaking through the 200 dma and trend line from the October 2011 low.

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A Question on the Math

A question came up from a friend regarding the math on protecting profits (post directly below). Was the math on my initial edge wrong, considering the proximity of the 200 dma? No, I don't think so, because the character of the move down might have been different—it might have been the kind of move that could have crashed right through the 200 dma. But that's not what the wave turned out like. I'll try hard to get comments enabled over the weekend.

The 200 DMA and Trend Line: Simple Math Shows When to Protect Profits on a Trade

SPY Trend Line and 200 Day Moving Average

SPY Trend Line and 200 dma

Assuming the price starts down again out of the ascending wedge the E-mini (ES) formed yesterday and overnight, it’s got to get through the potential head and shoulders necklines (see chart). It wouldn’t be unusual to get sideways moves (typically conventional triangles) at those lines (above, below or across). The price could also change direction and go for a new high from either of those lines.

But if the price fails to break out upward from the ascending wedge here, it gets much more likely that the SPX will retest its trend line from the October 2011 low and/or 200 dma (200-day moving average). We all know the price will bounce there, so it’s another decision point. You can close out the trade there, or even go long, and watch for another signal to short, such as a recrossing of the trend line or 200 dma. If the move up is a substantial one, it may even give a topping signal for a short entry very close to the top. Or, it may give a continuation signal and continue moving up.

In any case, the math on the Sornette bubble bet changes at the 200 dma. Assuming you put on your short positions at the topping formation breakout at 1635 on the ES (September contract), and assuming that the price hits the 200 dma at 1523, you will have 112 points of profit at $50/point, or roughly $5600 per contract profit. You will have already gained the profit on 44% of your expected 252-point+ Sornette bubble crash, leaving 140 potential points to go. You will still have only a 30% chance of getting the full 15% correction (or more) before getting stopped out. (See the bubble crash bet post for the reason why.) Should you risk your winnings of $5600 per contract to go for $7000 more per contract?

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