Monthly S&P500 Emini futures candlestick chart:
Strong bull trend, but parabolic wedge buy climax
The monthly S&P500 Emini futures candlestick chart has been in a strong bull trend for 8 years. In addition, it has been especially strong over the past 18 months. Furthermore, it has been extremely strong for 4 months. Whenever a bull trend becomes unusually strong late in the trend, the breakout is more likely an exhaustion move than the start of a new, stronger leg up.
That is the case here. Yet, buy climaxes can last far longer than what seems reasonable. The bears have neither a top nor a reversal down. Hence, the odds still favor higher prices. But, only experienced bulls should buy here because the risk of a 3 month pullback is now high.
Minor reversal likely
Since the 18 month bull channel is tight, the odds are that the 1st reversal down will be minor. Hence, the bulls will probably buy it within about 3 bars. Consequently, the odds are against a trend reversal without the bears 1st getting at least a micro double top. That will require both a small selloff and a test back up. Since this is a monthly chart, the downside risk is small for at least several months.
Weekly S&P500 Emini futures candlestick chart:
Extreme buy climax
The weekly S&P500 Emini futures candlestick chart has never been this overbought in its 18 year history. I say that based on how long it’s been far above its moving average. While there is no reversal down yet, this is a dangerous time and price to buy.
For several months, the odds favored a pullback to below the weekly moving average, which meant a 100 – 150 point pullback. However, as a buy climax becomes more extreme, the probability of a deeper correction increases. Consequently, the risk of a 200 point or 10% correction by the end of the year is increasing.
This week had a doji body, closing around the midpoint. It therefore is a signal bar for the bears next week. Yet, if next week ends up as a bull bar, it would erase the bearish potential. The bears therefore need a strong entry bar next week to convince traders that the correction has begun. Without it, the odds still favor sideways to up.
Daily S&P500 Emini futures candlestick chart:
Parabolic wedge top trying to reverse down
The daily S&P500 Emini futures candlestick chart is pulling back from a parabolic wedge rally. The odds are that it will continue mostly sideways this week. It might stay sideways for a month, like it did 4 other times this year (March, April, May, and June).
Since Friday was a bull inside bar, it is a buy signal bar for next week. Yet, because of the 8 bar tight trading range, the odds are that any move up or down next week will probably last only a few days.
Because the weekly and monthly charts also have buy climaxes, the odds of a 2 – 3 month correction are high before the trend continues much higher. The issue is when it will begin. Until there is a top and a reversal, the Emini is likely to continue sideways to up. Since most reversals fail, the probability is that this one will as well. Yet, the odds are getting better for the bears.
I am not sure I understand your meaning when you say ‘This week had a bear body. It therefore is a signal bar for the bears next week. ‘ I know that your definitions are sometimes somewhat different from the ones used by others, and that is cool. But this week’s bar has a close higher than the open (at least on the chart I view-which does not include after hours trading), and the close is above the half way point between the hi and the low( which I thought was the way you have identified a bull bar or a bear bar). So I am missing something here, and hope you can clarify the point. thanks
You are right, and I fixed it. I often begin writing the weekend blog before the close, and then miss some needed changes.
It’s close is around the middle and it is therefore still a sell signal bar, but a weak one.
Thanks,
Al
Dear Al,
In my own analysis I often question how objective these trend lines are. For example, the green trend channel line you drew on the daily chart is not how I would have constructed it.
Is it possible to connect the first higher low (April 16) with subsequent higher lows and create a trend line. This trend line is then duplicated and parallel shifted upwards. In my view the resulting trend channel line would connect the higher highs reasonably well, but your wedge would reside below it.
However, I also look at the March 1, June 11 highs to draw the trend channel line. In this case your wedge clearly overshoots the TCL, which may be indicative of an imminent reversal?
I suspect I don’t have the experience to identify major turning points of the market.
I constantly draw lines like that. It is impossible to know in advance which lines most computers will use. Traders simply watch how the market reacts when it is near the line. if it rallies strongly through it, the line is useless. If it reverses quickly, it is important. If it hesitates for several bars, traders get ready for a reversal or a breakout, especially if there is a 2nd entry with a good signal bar. This is true of every type of support and resistance.