The Megaphone Right Shoulder Set-Up
Shanghai Stock Exchange Megaphone Set-Up
The Shanghai Stock Exchange Composite is forming a megaphone top (gray on chart) within a larger megaphone (orange on chart). The orange megaphone is a right shoulder megaphone for a large H&S on the long-term chart.
Shanghai Composite H&S Megaphone Right Shoulder
Megaphone right shoulders often guarantee a squeaker higher high for a new head on a larger head and shoulder, but this one is likely going to be too small for that. This one is probably going to have to actually complete and break out upwards to get to a higher high, or it may break out downwards.
The Shanghai gray topping megaphone has just put in a melt-up 5th wave and a classic fake breakout through the formation top. The formation would usually put in a little H&S across or on top of the megaphone top before a melt-down to the formation bottom and ultimate breakout downwards to complete the orange megaphone.
Overwhelming Odds of a Reversal to a Lower Low
Because both ES and the Shanghai Composite clearly started megaphoning before the gray megaphone started to form, both are strong favorites to break out downwards from the gray megaphone to complete the larger orange megaphone.
Plus, the single strongest trading set-up on the ES and N:SPY charts is the NYMO close below -100 on August 24. A crash that causes a NYMO close below -100 is an overwhelming favorite to be followed by a lower price low.
And there are other trading formations on the ES daily chart that make the odds of taking out the August 24 low even higher. The trading situation right now is roughly the equivalent of holding a hand of four aces on the turn in Texas hold ’em while your opponent is holding a flush and can only suck out if the king of hearts hits the felt on the river.
Still, even if you’re a 98% favorite to win a hand, you’re not guaranteed to win the hand. Your opponent will suck out two times out of every hundred times you’re in this situation.
So you have to know when to shut down your betting, or in trading, when to reverse to bullish.
The Unlikely but Dangerous Sornette Bubble Set-Up
Shanghai Composite Sornette Melt-Up Set-Up
A Sornette bubble set-up is essentially a megaphone that fails to complete. Megaphones almost always retrace to VWAP before a genuine breakout, but in a Sornette bubble set-up, they fail to put in the retrace.
Instead, the price gets to the megaphone top, puts in the breakout that would usually be fake, tries to form a topping pattern up there, and then breaks out upwards from it.
Sornette melt-up attempts tend to fail in the second bobble.