Last week $SPX exceeded the upper trend line of the Megaphone pattern and calls of the pattern’s death have been plentiful since then. But is the pattern truly invalidated?
Since the summer I’ve state clearly: For bulls to convince they need to break above the trend line, then successfully retest the trend line and then they can move onto the melt-up move if that’s what they want to do.
Well, price has clearly moved about the trend line:
Now you can blame/credit central bank intervention all you want, but reality is price moved above it. But does this confirm the breakout?
From my perch the answer is no as no retest has taken place yet, and without such a successful retest risk remains that the breakout will prove to be false.
And let me throw in another wrinkle here that’s quite eye opening: If you look at the market through a larger lens, i.e. the entire market, then the megaphone trend line has not been exceeded nor even quite tagged yet.
Here’s the $VTI the overall market ETF:
The Fed’s liquidity interventions since September and October may have sparked an aggressive, steep rally to exceed the July highs by 2% (so far), but according to the larger market the megaphone pattern is still quite alive and reports of its demise may be greatly exaggerated.
And it is right here in this moment in time that $VIX short positioning has taken on record proportions, exceeding even the previous record short right at the January 2018 highs right before holders of the doomed $XIV product got massacred as $VIX exploded higher:
— Sven Henrich (@NorthmanTrader) November 11, 2019
Shorting the $VIX has been a regular occurrence during all rallies to new highs, even this July as $SPX reached 3028, and then came the $VIX rip that was also advertised by the charts in advance.
The pattern repeats the same volatility compression to extremes as $SPX pursues a tight channel structure, then a positive divergence forms on $VIX, people getting bullish and then rug pull. I submit the construct in the charts is very similar now compared to July:
As I outlined in Melt-up: “In my view the $VIX has a coming appointment with the 17 level. The nature of that appointment may well decide everything”.
The firepower that is being built in short $VIX positions may certainly suggest that a real risk off $VIX spike could also easily exceed these levels.
With many participants celebrating the demise of the megaphone pattern they are doing so with $VTI not yet having exceeded the upper trend line and record short $VIX positioning in place. Perhaps it is not the megaphone that will experience megadeath, perhaps it will be complacent positioning.
It’s too early to tell and the jury remains out, but the charts clearly highlight coming volatility risk.
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