ES Megaphone Welter

ES Red Flat-Topped Megaphone

ES Red Flat-Topped Megaphone vs Blue Megaphone

First, ES has nothing that even resembles a legal top on the daily chart yet.

Second, ES is trapped in a welter of megaphones inside megaphones within its trading range since the March 1 high. No way it escapes this mess easily.

ES has a kinda sorta flat-topped megaphone on the chart (red) and has put in a false breakout through its top at roughly the March 1 high.  That would usually mean a trip down to take out the formation low (green scenario) before a breakout through the top to morph the whole mess into the blue megaphone.

Or ES could still be working on getting straight to the area of the blue megaphone top (purple scenario).

There’s a small rising megaphone on the chart out of the April 17 low that didn’t top properly with a head and shoulders inside the formation.  That would usually mean we see another stab through 2400 even if the flat-topped megaphone is in play (orange scenario).

The proper attitude toward any move within the recent trading range right now is high skepticism.  The only exception would be if a price channel meltdown sets up.  No sign of that yet.


IWM Technical Top vs Passionate Top

Crashes Don’t Start on Technical Trading

IWM Keeps Reversing on Exact Touches of its Red Megaphone Top

IWM Keeps Reversing on Exact Touches of its Red Megaphone Top

IWM keeps reversing on exact touches of its 3 1/2 year red megaphone top. It could do that all the way to a breakout from the pink rising megaphone.

If it does, the green or blue scenarios become the favorite.  Great crashes don’t start on exact reversals from important lines.

If IWM can break through the red megaphone top by enough to form a topping pattern up there, it becomes a favorite to go all the way for the red megaphone bottom after it completes a top and breaks out of the pink rising megaphone.

Potential Set-Up for One of the Great Bull Markets of All Time

Note that the green scenario’s reversal at the red megaphone VWAP would lead to either a second trip to the red megaphone top before a crash to its bottom, or a genuine breakout from the red megaphone (blue scenario) with a technical target of at least 200, and the breakout could lead into one of the great bull markets (or bubbles) of all time.

The blue scenario would essentially convert the red megaphone into a giant Sornette melt-up set-up.

I posted a few days ago that Neely is looking for a market crash.  When you have a set-up for a crash, and the market won’t crash, that’s a great set-up for a melt-up.


QQQ Rising Megaphone in Rising Wedge

QQQ has Formed a Rising Megaphone (Bright Blue) in its Red Rising Wedge

QQQ has Formed a Rising Megaphone (Bright Blue) in its Red Rising Wedge

QQQ is now creeping up the top of the red rising wedge it began forming a year ago.  It’s working on the top for a price-channeled move within the rising wedge, and has also formed a rising megaphone (bright blue) inside the wedge.

That blue rising megaphone counts as a way of extending the wedge.  An extended rising wedge is a strong favorite to correct to its bottom once it finally breaks down.

The rising wedge has carried QQQ to the top of a rising megaphone that began in 2010 as well as the navy blue megaphone that began forming in the summer of 2014.

QQQ needs to retrace to at least VWAP of the orange megaphone, which would take it to the bottom of the red rising wedge.  It’s a favorite to correct sooner or later to the bottom of the navy blue rising megaphone at roughly 42.

And QQQ could remain stuck in the navy blue megaphone for years to come.

QQQ Long-Term Chart

QQQ Long-Term Chart

I’ve drawn a smallish fast top on the navy blue megaphone, but tops like this can take months to form.

Note also that the green scenario is a simple, standard way for the navy blue rising megaphone to extend.  That is another trading formation that could extend for years, though usually we’d see a return to the formation bottom first.

Comment on Neely Set-Ups

My Experience with Neely’s System

I’ve posted in the past few days here and here on a Neely crash call.  We have a small bunch of regulars here who have seen me post on Neely enough times that I assumed everyone already knew my general views on him.  But let me restate these views for anyone new who might wander in.

Like everyone, Neely has stronger and weaker trading set-ups.  I posted about this set-up because it is one of his stronger ones.  He has a good record when it comes to a call this strong.

However, even with that good record, I prefer not to use Neely’s entry points and stops, which is why I also posted my own. I subscribed to Neely’s service some years back for a period of a few months because I like his book, The Neely Method.  I’ve gotten a number of valuable trading set-ups from his book.  (Ironically, he didn’t use, or even seem to recognize, many of those trading set-ups himself at the time I subscribed.)

I didn’t continue subscribing to Neely because, after a few months, I felt I knew how to use his trading discoveries better than he did.

Big Fluctuations are Characteristic of Many Trading Systems

At the time I subscribed to his service, Neely tended to jump in to a trade the moment he had confirmation of a trend change, which tended to be far from the top, and then set a stop a big distance away.

This is not an unusual or incompetent way to enter a trade.  The Turtle Traders entered trades on breakouts from 20- or 50-day trading ranges, with stops set according to recent volatility (2 ATRs, or average true ranges, away).  Since tops and bottoms are often characterized by high volatility, the Turtle Traders often used stops as far away as Neely’s, and they made a fortune.

With these types of systems, you have to accept from the start that your bankroll is going to go through huge fluctuations.  It would not be uncommon for someone using the Turtle Trading system to lose 2/3 of his trading bankroll at some point due to normal losses from stop-outs.

The key to surviving a system like this is proper risk management, which means limiting risk by strictly limiting bet size to a small fraction of your bankroll and diversifying your trades.  One problem with the recent tendency to Fed-managed markets is that all markets have tended to move in sync with Fed actions, and that hurt common risk-management strategies.

Without proper risk management, you are virtually guaranteed to go bust with a system like Neely’s or the Turtle system. Jesse Livermore used a similar system without proper risk management and went bankrupt several times.

I recommend reading Way of the Turtle by former Turtle trader Curtis Faith for the best discussion I’ve seen of trading entries, stops and risk.

How I’m Using Neely’s Call

I hate loose stops and I hate big hits to my bankroll and I hate big negative fluctuations.  That’s why I don’t use Neely or Turtle entry points and stops, even though I recognize that for many people they’re the best way to go.

I always post my own triggers.  I don’t post stops because everyone is using different trading instruments, and some people are going to stick with a trend all the way and others are going to hop in and out on small moves.  You can’t set a stop for a trader without knowing these factors, so instead I try to give an idea of what would tell you a trade is going wrong.

I regard Neely calls as something to keep in mind, not act on. I showed my own potential crash set-ups on the long-term charts here. The trading set-ups I post are never predictions.  They are set-ups to bet if the set-up actually triggers.  If the set-ups don’t trigger, we’ll see a different set-up for another move up and I’ll post about that.

Short-term, I still expect the markets to go higher, but I’m very watchful right now for something unexpected.

In Conclusion

Neely’s system is a valuable tool to be used in trading. I have a lot of respect for Neely. I’ve learned a lot from him. Neely has provided trading set-ups that will make money over the long run if used with proper risk management.

No trading system, including Neely’s, can predict the future, and any trading system, used without proper risk management, is a favorite to kill your bankroll.