Market Overview: Weekend Market Analysis
The SP500 Emini futures market has an outside up bar in October after an outside down bar in September, the 2nd consecutive outside bar on the monthly chart. Traders should expect at least slightly higher prices in November.
The EURUSD Forex market is reversing up from below its yearlong trading range. It might have to dip below the March 9, 2020 Breakout Point before there is a sustained rally up to the September 3 high.
EURUSD Forex market
The EURUSD weekly chart
- This week’s candlestick on the weekly EURUSD Forex chart was a second consecutive bull bar. Since it had a prominent tail on top, it is less bullish than it might have been.
- The bulls are hoping that the past 2 weeks are the start of a reversal up from below the yearlong trading range, which is also a head and shoulders top.
- There are 2 problems with this reversal.
- First, it followed 5 consecutive bear bars, which means relentless selling. That increases the chance that the bulls will need a micro double bottom before they can get a reversal up to the September 3 high.
- Second, the EURUSD has been in a trading rang for 7 years. When there is a trading range, traders look for reversals. They usually come after probing beyond support or resistance.
- A reversal up from below the yearlong trading range is consistent with that.
- However, 2020 broke strongly above the June 10, 2020 and the March 9, 2020 highs. This reversal up did not dip below either of those breakout points, but it got close. Since the EURUSD has been in a trading range for 7 years, those are very important support levels, and they are within reach. That means that they are still strong magnets below.
- If traders see the 10-month selloff on the weekly chart as a wedge bull flag (with the March 31 and August 20 lows), then the reversal up from above a breakout point makes sense.
- However, it is more likely that the selloff is a bear leg in the trading range. Therefore, unless the rally continues up for at least a couple more weeks, the odds are that there will be one more leg down to below the March 9, 2020 high.
- What happens if the EURUSD falls below both breakout points? It should then reverse up.
- Why? Because legs up and down in trading ranges typically disappoint bulls and bears.
- A break below major support therefore should disappoint the bulls.
- That means there would probably be a reversal up, which would disappoint the bears.
- This year’s selloff is still only about a 50% pullback from last year’s strong rally. Consequently, traders should soon expect a rally lasting at least several weeks. The bulls need to do more before traders believe it is underway.
- Therefore, there is still better than a 50% chance of a dip below one or both breakout points before there is a sustained rally back to the September 3 lower high.
- The odds are that there is not much left to this selloff before there is a rally up to near the September 3 high.
S&P500 Emini futures
The Monthly Emini chart
- The candlestick on the monthly Emini chart is a big bull bar closing near its high with one week remaining in October.
- September was a big bear bar and an outside down bar. That means it traded above the August high and then below the August low.
- October is an outside up bar.
- Consecutive outside bars is an OO (outside-outside) pattern, which is a Breakout Mode condition. Theoretically, bulls will buy above and bears will sell below. Both will look for at least a measured move based on the height of the pattern.
- There is one week of trading remaining in October. The more the candlestick closes on its high, the more likely the Emini will trade higher in November. The bulls would also like the month to close above the September high.
- If October closes near its high, November might gap above the October high and create a rare gap on the monthly chart.
- Rarely, an outside up bar reverses down before it closes and then goes back below the low of the prior bar. It then becomes an outside down bar. With the monthly chart being in a strong bull trend and having a surprisingly strong reversal up in October, that is very unlikely. The bears would be happy if the month closed below the middle of its range. Even that is unlikely at this point.
- September was the third time that a bear bar interrupted the strong rally on the monthly chart. A third reversal attempt has a higher probability of being successful.
- Most prior bear bars in buy climaxes on the monthly chart led to a 2nd bear bar within a bar or two. That means the bears hope that November rallies and then reverses down at the end of the month to close below the open of the month.
- Will that happen? With October being surprisingly strong, November will likely be another bull bar. Traders will begin to wonder if the Emini will reach the 5,000 Big Round Number before there is more than a one month reversal.
- How much higher can the buy climax continue? Climactic rallies often last far longer than what might appear reasonable.
- However, an OO pattern is a pause and a brief area of agreement. Three sideways bars is often a magnet, which tends to draw the market back to it after a breakout. Therefore, there is an increased chance that it will be the Final Bull Flag before there is a correction lasting at least a few bars.
- However, the breakout above the OO often lasts several bars before there is a reversal. That means traders should expect higher prices at least into early November, and probably for at least a measured move up based on the height of the OO. That target is around 4,800.
The Weekly S&P500 Emini futures chart
- This week’s Emini candlestick was the 3rd consecutive bull bar closing near its high after a 6-week pullback in a Small Pullback Bull Trend.
- The bears want a double top with the September high, but the 3 strong bull bars after a 6-bar bear micro channel was a low probability event. A surprise typically has at least a small 2nd leg sideways to up. Therefore, the bears would need a surprisingly strong bear bar next week before traders would look for a double top reversal.
- More likely, next week will be sideways to up.
- A Small Pullback Bull Trend is a bull trend where the pullbacks are small. This one began with the pandemic crash. The biggest pullback was 10% and it came a year ago.
- A Small Pullback Bull Trend ends with a big pullback. That means a pullback that is at least 50% bigger than the biggest prior pullback. Here, the trend will remain intact until there is at least a 15% correction.
- Once it ends, the bull trend typically converts into a trading range. Initially, the odds are that it will be a bull flag. Traders expect the trend to resume. If it does, it is usually a weaker bull trend.
- If the trading range lasts 20 or more bars, the probability of a reversal into a bear trend begins to get close to 50%.
- After the September selloff, I said there was a 50% chance that the Small Pullback Bull Trend was ending. But I also said that there was a 50% chance that it would continue. The strong rally over the past 2 weeks shows that the trend is intact.
- What is the next target for the bulls? The bears want a double top with the September high. Their attempt will probably fail. Instead of looking for a measured move down, traders should look for a measured move up. Therefore, the target is the same 4,800 target that the monthly chart is projecting.
The Daily S&P500 Emini futures chart
- Friday’s candlestick on the daily Emini chart had a small bear body after a streak of 7 consecutive bull bars.
- It traded above Thursday’s high and below its low. Friday was an outside bar.
- It is only a doji bar, which is a low probability sell signal or buy signal bar.
- It is neutral and increases the chance of more sideways trading on Monday.
- Also, the day after a big day that closes in its middle has an increased chance of having a lot of overlap with that day. This increases the chance of a 4th sideways day as traders decide if the breakout above the 4-month trading range will succeed.
- A streak of 7 consecutive bull bars is a sign of relentless bulls. They therefore will buy the first 1- to 3-bar pause or reversal down.
- It is important to note that there are now consecutive closes above the September high, but Friday had a bear body and it did not close near the high of the bar. Therefore, this breakout above the September high so far is not as convincing as it could be.
- The small breakout with the hesitation still gives the bears hope that the breakout will fail. It increases the chance of the Emini stalling here for several more days as traders decide it the breakout will succeed or fail.
- But the bears will need at least a micro double top or three consecutive bear bars closing near their lows before traders will think about a possible reversal down from a double top with the September high.
- If there was a reversal, it would be from a higher high major trend reversal and an expanding triangle top at around a measured move up from the pandemic low to the pre-pandemic high (see weekly chart above).
- There would still be only a 40% chance of an actual trend reversal. A trend reversal down means a bear trend after a bull trend. Sixty-percent of the time, a major trend reversal ends up being minor. That means either a bull flag or a trading range.
- Consequently, traders should expect higher prices.
- How high? The 4-month trading range is from the September high to the October low. It is therefore 267.25 points tall. A measured move up would be 4802.00, or about 4800.
- That is close enough to the 5,000 Big Round Number to make traders begin to think that the rally will reach it before there is more than a small correction.
- Will the Emini reach the 4800 magnet, or will the breakout above the September high fail? It might do neither. At the moment, traders should expect higher prices, possibly for the rest of the year.
- However, the rally to the September high has been extreme. That increases the chance of several sideways days over the coming week. But unless the bears begin to turn the Emini down, it should go higher.
Final week of October
- Next Friday is the final day of the week and of the month. Markets often have surprising big moves in either direction just before a bar closes.
- That means weekly and monthly support and resistance might be important at the end of the week, especially in the final hour on Friday.
- The most important magnets are the September high and the high of the month. The more the month closes above the September high and at the high of the month, the more likely the strong rally will continue into November.
- The bears would need a big selloff next week to change that. If they get it, November might be more sideways than up.
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