The Emini finally broke above the late 2018 triple top to a new 6 month high. However, the daily chart has been in a trading range for 16 months. Traders should therefore expect disappoint. This bull breakout will probably fail within 2 weeks.
The crude oil futures contract is getting close to a 50% retracement of the bear trend. It will probably get there within a couple weeks. That is also at the top of the bull channel and around the $60 Big Round Number. Once there, it will then probably trade down to around $51 over the following 2 months.
The EURUSD Forex market is awaiting a Brexit resolution. While it is in a bear channel, the channel is basically a 4 month tight trading range. Traders will continue to bet on reversals every 2 – 3 weeks.
Crude oil Futures market:
3rd leg up in a wedge rally to above $60
The crude oil futures market is near the top of its bull channel. In addition, it is just below the 50% retracement of the bear trend and the $60 Big Round Number. I wrote last week that this week would be up. There is still room to the magnets above. There is only a 25% chance of a successful bull breakout above a bull channel. With the other resistance slightly higher, the rally will probably stall soon.
Because the bull channel is tight, the 1st reversal down will likely be minor. However, a bull channel with 3 or more legs functions as a wedge, which is a buy climax.
A reversal from a buy climax typically has at least 2 legs sideways to down. In addition, it usually has about half as many bars as there were in the bull channel. Finally, traders should expect a test of the start of the channel. That is the January 14 low of 51.01.
There is no top yet and room to the targets above. Therefore, the chart rally will probably go above $60 before the bulls will take profits and the bears will begin to sell. The reversal will probably begin within 3 weeks.
The selloff will probably be sideways to down for a month or two. Traders expect it to end around $51. At that point, the bulls will buy again and the bear will take profits. The bull channel will then have transitioned into a trading range.
EURUSD weekly Forex chart:
Weak bear channel, awaiting Brexit news
The EURUSD weekly Forex chart has been in a weak bear channel for 9 months. The past 4 months have been essentially in a tight trading range. There have been many minor breakouts up and down, but the chart continues to reverse every 2 to 3 weeks. There is no technical reason to expect a strong breakout up or down.
Everyone knows that this mostly sideways trading is due to the uncertainty of Brexit. Consequently, at some point there will be clarity. Once there is, the chart will again trend.
No one knows the direction. When a market is in a tight range, traders should assume that the probability of a bull breakout is the same as for a bear breakout. Additionally, they must understand that there is a 50% chance that the 1st breakout up or down will fail and reverse.
Until there is a breakout, there is no breakout. Traders will continue to look for reversals every 2 – 3 weeks.
Monthly S&P500 Emini futures chart:
3rd consecutive bull trend bar
The monthly S&P500 Emini futures chart so far this month is forming a 3rd consecutive bull trend bar. However, the rally is back to the 2825 area. That has been major resistance for 16 months.
There have been two strong breakouts above this level and both reversed down strongly. In addition, there have been many tests of this resistance that failed. The strong 3 month rally is another attempt to break above.
The momentum is strong enough to make traders believe that the rally will continue up to the all-time high. But, look to the left. The monthly chart has been in a trading range for 16 months.
One of the hallmarks of a trading range is that traders repeatedly become disappointed by the lack of follow-through. No matter how strong selloffs and rallies have been, every one reversed after a few months.
Will this one be different? Is the 3 month rally the resumption of the 9 year bull trend? Or, is it just another strong leg in the trading range?
My 80% rule on inertia
Markets have inertia. They resist change. When the market is trending, 80% of attempts to end a trend fail. The reversal typically becomes a flag and the trend then resumes.
Similarly, trading ranges,like this one, have inertia as well. My 80% rule on inertia also applies to them. Traders should expect that 80% of attempts to break into a trend will fail, and the trading range will continue.
That is what is likely here on the monthly Emini chart. Even if the bulls get a new high, the odds are that it will fail and reverse down. This is just like the strong selloff in December that broke below the February 2018 low. Traders should expect reversals and a continuation of the trading range.
Every trading range eventually breaks into a trend. As strong as this leg has been, it is still more likely to be a leg in the 16 month trading range instead of a resumption of the 9 year bull trend. Therefore, the trading range will probably continue for at least several more months. Until there is a clear breakout with consecutive closes above or below the range, the odds favor reversals.
Weekly S&P500 Emini futures chart:
Strong rally, but at 2820 resistance
The weekly S&P500 Emini futures chart completely reversed last week’s selloff. It closed at a new 6 month high, above the October-November-December triple top.
In mid-February, I wrote many times that 9 consecutive bull trend bars on the weekly chart is extremely unusual. Typically, that leads to exhausted bulls who take some profits. I said that the odds favored a 2 – 3 week sideways to down move beginning within 1 – 2 weeks. The past 3 sideways weeks met that minimum goal.
Therefore, the bulls have a reasonable chance at resuming the bull trend. That is especially true since the past week rallied to above the top of the late 2018 triple top.
Last week was a big outside down bar on the weekly chart. It was a sell signal bar for this week. But, instead of this week trading below the prior week’s low and triggering the sell signal, the week rallied strongly and broke above the bear outside down bar. That is a sign of strong bulls.
Possible head and shoulders top
If the Emini fails to continue its breakout above that October high next week, traders will begin to wonder if the breakout will fail. The bulls will begin to take profits and the bears will sell more aggressively. The result could be a break below the low of 2 weeks ago and then a measured move down to between 2600 and 2700. The bears will see the lower high as the right shoulder of a head and shoulders top.
Is that likely? The weekly chart is still below the all-time high. Whenever there is a strong rally, look to the left. If that strong rally stops around a prior lower high, it might be the 2nd leg up in a double top bear flag. Here, it would also be an head and shoulders top.
At the moment, despite the strong rally, there is still a 30% chance of a selloff from around this level to far below the December low. A measured move down from that low would be to around 1900.
Daily S&P500 Emini futures chart:
Emini 3 month rally stalling at 2820 triple top
The daily S&P500 Emini futures chart broke strongly above the October-November-December triple top on Friday. That level has been strong resistance for 16 months. Even though the bulls broke far above it in January and July last year, both breakouts led to huge reversals down.
The momentum up over the past 3 months is a sign that bulls are eager to buy. Consequently, even if there is a strong reversal down to 2600 over the next 2 months, the bulls will be buying.
The 3 month tight bull channel is strong enough so the 1st reversal down will be minor. That means it will probably lead to a higher low. In addition, the rally from that low will likely test the top of the current rally.
The bears will try to create a double top at that point. That will be at least a couple months from now. Until then, the down side will probably be limited to around a 50% retracement of the 3 month rally. That means a test of 2600.
New all-time high without first getting a 2 month pullback?
What about the upside? The bulls want the rally to continue up to a new all-time high. The momentum up is strong enough to achieve that. However, the context is bad. The rally is still a leg in a trading range. Consequently, traders should expect disappointing follow-through buying.
Since that is likely, this rally will probably fail within a couple of weeks. Once it reverses, the Emini will try to test the most recent higher low. That is the March 8 low of 2726.50. That is the neck line of the possible double top with the March 4 high.
If the selloff breaks below that low, it could continue for a measured move down to the January 23 low. That was the start of the tight bull channel. In addition, it is around a 50% pullback and the 2600 Big Round Number.
There is no top yet. This week closed at a new 6 month high. While the Emini probably will go at least a little higher, it will probably then reverse down for a couple months.
The bears need a strong sell signal bar. There is none yet. However, the bulls will probably begin to take profits within a couple of weeks. Since the rally is so extreme, the profit taking could last 1 – 2 months and fall to near the January 23 low at around 2600.
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Charts use Pacific Standard Time
When I mention time, it is USA Pacific Standard Time (the Emini day session opens at 6:30 am PST, and closes at 1:15 pm PST). You can read background information on the intraday market reports on the Intraday Market Update page.