The Best Bear Market Scenario is the Larger Gray Falling Megaphone Set-Up
New Trend Line May Be Important
On Thursday and Friday, ES honored a new trend line established last Monday (gray on chart). That trend line may be important.
Remember, ES has drawn a potential head and shoulders top on the chart for the move out of the January 20 low. There are also a number of blow-off top set-ups on the chart for a move to 2400 (see the set-ups here).
But if ES can actually break out of that H&S top, it will put a potential set-up for the larger gray falling megaphone on the chart.
A Breakout Sunday or Monday from the H&S would Not be Enough to Confirm
A breakout through the H&S neckline would not be enough by itself to confirm the gray falling megaphone. That breakout would leave some very bullish set-ups on the chart.
To confirm the gray falling megaphone, ES would have to break out of its inverse H&S, retest the January 20 low, then retest the H&S neckline and orange megaphone VWAP while continuing to honor the top of the potential gray falling megaphone or piercing it by only a bit.
ES could still redraw the gray trend line by forming a triangle right shoulder on its H&S top. A triangle is one of the few things that could cross that trend line without killing this set-up. Any other genuine breakout through that trend line would kill the set-up and confirm a blow-off top set-up. A triangle right shoulder that forced a redraw of the gray falling megaphone top would actually make the formation look better. It’s too narrow at the bottom right now.
Then ES would have to follow up with a take-out of the January 20 low. If ES takes out the January 20 low with this series of moves, ES will have confirmed the larger gray falling megaphone.
The Megaphone False Bottom Scenario
This is the best bear market scenario I can come up with. This is essentially a recipe for one final falling megaphone down to establish a larger falling megaphone (again, gray) that includes the topping waves above 2000.
This move down would absolutely be the last before a retrace to the falling megaphone top at 2077. No further extensions would be possible.
The first take-out of the January 20 low and retrace would be the left shoulder of an inverse H&S that would actually end up breaking out upwards.
The head would be a double wave down.
The target would be the bottom of the big megaphone that formed off the August 24 low (red on chart below).
This is a megaphone false bottom scenario. Once megaphones get very large, they will often put in a false top or bottom at roughly the level of the previous megaphone high or low. Then they retrace to VWAP before continuing to the megaphone side.
Megaphone False Bottom Scenario
An inverse H&S at VWAP of the big red megaphone would target the megaphone top. A reversal at VWAP from a false bottom would target the megaphone bottom.
More Bear Market to Come
By taking ES to at least 1700, ES would trigger a flat-bottomed megaphone set-up on its daily chart that would eliminate a requirement to put in a new all-time high on the retrace to 2077. Instead, ES would likely reverse at 2077 for a trip to a much lower low.
ES would essentially be putting in a wild megaphone here (blue on top chart). The target for a downwards breakout from that megaphone after the retrace to 2077 would be roughly ES 1225.
Opex Timing
Next Friday is the start of the opex effect on the market. That means next Friday is likely to be either the start or end of this move if this move is going to occur.
ES was putting a little inverse H&S bottom on a one-day falling megaphone at the close Friday. If ES breaks out upwards from that little inverse H&S, the minimum target is 1910, which would be roughly at the top of the potential gray falling megaphone.
If ES triangles all week between the H&S neckline at 1864.50 and roughly the gray falling megaphone top, a downwards breakout from the triangle late in the week could set up an opex melt-down.
If ES instead breaks out downwards from its H&S Sunday night, it likely must complete its move down by the start of opex, or an opex melt-up could cancel the move.
Don’t Forget the Blow-Off Top Set-Ups
Don’t forget that it would be awfully easy for ES to kill this bear market set-up and trigger one of its blow-off top set-ups for a move to 2400.
A breakout from an inverse H&S at a major megaphone VWAP is one of the most bullish set-ups I know.