Why This is Likely a Head and Shoulders Rather Than a Megaphone Top
ES is Working on the Right Shoulder of an H&S
ES is likely working on the right shoulder of a head and shoulders top for the rally out of the August 24 low. It’s a large H&S that would target roughly 1711 upon a downwards breakout.
Normally ES could be putting in a wave to the potential megaphone top (purple), and I can’t absolutely rule that out, but it’s unlikely in this case because ES failed to put in a megaphone bottom at the late September low. The fast lift-off we saw would usually mean a right shoulder.
Also, ES is working its way down to take out the August 24 low (see NYMO Lower Low Trading Set-Up below), and odds are high based on the timing of past NYMO lower lows that the FOMC high was the high before that lower low.
Working On a Right Shoulder Top
Right shoulders are often melt-ups because the target is obvious. In this case, the left shoulder top is at roughly 1985.
This particular right shoulder began with a rising wedge that put in the minimum required touches on each side before breakout. That means the formation would usually complete with a sideways topping pattern, like a megaphone or head and shoulders. ES is working on that formation now, likely melting up into the head of a head and shoulders. We’d usually see a little H&S top on the head of an H&S, and ES has already put in the left shoulder of one of those.
I’m not sure yet where the head of the little right shoulder H&S will top, but it’s unlikely that ES can get all the way to 1985 because it’s working not just on a right shoulder, but on the topping formation for the rising wedge that started it. Also, ES melted up to a multi-megaphone VWAP level today and it would usually run into heavier resistance there.
On the other hand, the blue line on the chart is the top of a potential falling megaphone (it needs a lower low to confirm). Prices often rally far enough to pierce the top of those formations before reversing.
NYMO Lower Low Trading Set-Up
The single strongest trading set-up on the chart remains the NYMO close below -100 on August 24. A NYMO close below -100 virtually always means a lower price low will follow.
See “2000 vs 2011″ for likely scenarios on the breakout to a NYMO lower low.