SPDR S&P 500 (ARCA:SPY) has selected the megaphone option over the inverse head and shoulders option.
That means the most likely scenarios from here are the purple or green scenarios on the chart above. The green is roughly a 2:1 favorite over the purple, and the target for the upward breakout from the megaphone would be a new all-time high. There’s less than a 5% chance of the orange scenario.
There’s a fast candle down on the megaphone breakout past this morning’s earlier low. That’s because that was a potential head and shoulders breakout (after an admittedly small right shoulder).
Usually with a megaphone right shoulder on a potential head and shoulders you’ll see two false neckline breakouts.
Now here are the warnings.
1. I can’t absolutely rule out that we just saw a genuine head and shoulders breakout.
2. I can’t rule out a smaller, tighter continuation megaphone that would break out downwards. In October 1987 the SPX hovered around its 200 dma in a way very similar to what’s happening today. Then the consolidation broke out downwards straight into a crash.
So you have to be cautious about that. A head and shoulders or megaphone top is not absolutely required here. The breakout from the 3-year rising wedge was enough to launch a big correction. Bulkowski