Weekend Note: Potential Crash Channel Established on Terrible Close

Crashes are Characterized by Failed Bottoming Patterns

The SPX closed below its 50 dma after retesting and falling from its 40 dma. The Hilsenrath rumor failed to result in a new promise from the Fed.

SPY failed to break out upwards from its bottoming formation and will therefore probably make at least a new low. A new low on SPY means an important breakout past resistance on the E-mini. SPY is already below the equivalent resistance (the June 18th high). They just keep blasting through.

Stock market bubble formations are characterized by repeated topping formations that break out upwards. Crashes are characterized by repeated attempts at bottoming formations that break out downward.

The E-mini has at least two failed bottoming formations near its current low, and the one it’s working on now isn’t doing what it should.

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Combo Sideways Bottoming Pattern in Crash Context

So if you took the breakout past the earlier morning lows to reenter a short position, there is now a potential mini inverse H&S forming with a neckline at that breakout. If the price breaks out upward through this neckline, you have a decision to make.

Combo Sideways Bottoming Pattern That May Fail

Combo Sideways Bottoming Pattern That May Fail

What I believe is happening is something I think of as a combo sideways pattern. This is essentially a sideways series of bottoming patterns. The maximum series length you ever see is three bottoming patterns next to each other—just a truly messy sideways move, but comprised of separate discernible trading formations hooked together. For example, if we were to get a third formation in this series, it would probably be a symmetrical triangle forming next to the potential inverse H&S.

Sometimes it just takes more of a consolidation to put in a bottom or build enough resistance to get a meaningful breakout from a continuation pattern.

All other things being equal, this kind of sideways move would break out upwards about 2/3 of the time and downwards about 1/3 of the time. But this particular pattern is forming in a Sornette bubble crash context.

If the price breaks out upwards through that little inverse H&S neckline near today’s lows, you may see the price move up to the top of the consolidation area to build the larger inverse H&S pattern drawn on the chart above. The larger formation needs a significant dip for a right shoulder and will probably retest that little neckline. So I don’t think there’s much danger in just leaving a short position on over the weekend.

Again, the reason you may want to leave a short position on over the weekend is because of the Sornette bubble crash context here. There’s a real possibility that all bottoming attempts fail and the price just goes straight into a crash before the market reopens Monday.

Russell’s Big Volume Bar

IWM's Big Volume Bar was Buying into the Selling at a Small H&S Breakout

Russell Futures Big Volume Bar was Buying into the Selling at a Small H&S Breakout

Today’s biggest volume bar on Russell futures occurred at the open with a downward breakout from a very small head and shoulders pattern that had formed overnight in the likely area for a right shoulder top for the larger head and shoulders pattern.

Russell Futures Head & Shoulders, with Right Shoulder Waiting to Return to the Neckline

Russell Futures Head & Shoulders, with Right Shoulder Poised to Return to the Neckline

Heavy buying into the technical selling from the breakout brought the price back up to the neckline.

It is sophisticated players who use a breakout to enter a position in the opposite direction of the breakout.

I’ll post the day’s put-call ratios later when they’re available.


Tuesday A.M. Note (Updated 2x)

So if the ES and SPY take out the wedge low, they’re likely going to retest the July 26th low, and no sense in sitting on longs for that. (Unless they don’t make it to the July 26th low because of heavy buying into the selling at the neckline breakout.) You have to sort of Jesse Livermore this trade.

Update: And then, even if the wedge low holds this time around, they may take the price up the rest of the way to left shoulder height and then bring it back down to the neckline again. So a breakout past the current right shoulder high is no guarantee of safety.

Update 2: Note also that there’s a big difference between the wedge low on the E-mini and the wedge low on SPY, as well as the wedge breakout levels on each. It’s possible for the wedge to have different meanings on SPY and the E-mini. In other words, it’s possible for the wedge low to be taken out on SPY but not on the E-mini.

You just have to assume they’re going to make this as hard on you as possible.