Market Overview
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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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.
I mention this on the forum site too. I dunno how much you (Al) look at those, so I will try and think high here aswell.
I am pretty aware of your view on Fibonacci levels and such. I tend to agree with you (why wouldnt I!?!?) on shorter time frames. That retracement on .382 /.6xx is overshoots/undershoots on 50%. BUT
I am a member of a big fibonacci/elliotwave site aswell. Most of you probably know the site. They have almost exactly same view on the market as you regarding pullbakcs/BO/trading ranges. I am fascinated how accurate their predictions/expectations/odds/whichever word you will use, is so close to your PA view/predictions/expectations.
Do you have any view on why? Or do you simply dont care? Remember, I have not been seeing as much of market as you and I have not done much research regarding Fibonacci so I am asking out of curiousity. I hope I can still learn (ofcourse I can, your course is so awesome!) something. (I do however only have 20Ema/1hr 20ema (220 on 5 min chart) on my chart. (and a oscilator which is just habit i guess..)
If you seen the discussion on forum, regarding how indices (cash) is so precise regarding measured moves/leg1=leg2 when it is 500 different stocks deciding the value of the indices, the best answer is “big numbers law”. Do you think fibonacci is useless even when it seems to work on a “big number” perspective.
(I hope you didnt fall asleep before reading until end. I have this habit of explaining thing to “death” so people dont misunderstand me)
Per Erik
I have spent a lot of time studying Fibonacci numbers, and I have talked about them in the course. There are many reasons why I think they are useless for trading. The first is that I have never met anyone who has consistently made money from them. That makes sense because Fib users are trying to limit what the market can do, which is absurd. Anyone who believes that the probability is high that the market will do something will lose money.
It is natural for everyone to want a protector. For Fib traders, they created Fib as their god. But, since the market is atheistic, a god is useless. Prechter is the best known Fib prophet. I remember 20 years ago, a tracking service followed his advice from his newsletter. I believe they found that it resulted in losing 95% of the account value after 5 – 10 years. And this is with the world’s leading Fib expert. What should lesser traders expect?
Furthermore, there are so many Fib retracement and extension levels that virtually every price is very close to one. Since Fib traders are happy with the market is very close, the market is always at a Fib number.
Finally, 50% retracements and extensions, prior highs and lows, trend lines, measured moves are far more important. Since every price is a Fib number, these major support and resistance levels are always at a Fib number, and they are easy to see.
Thanks for your very clear opinion! A lot of this was new to me and some of it had not crossed my mind, but makes sense.
I do agree with you and Mark Douglas in “owning” the risk/responsibility for your trading or you won’t make it far if you don’t… (at least I think I got that from your lectures as well as Douglas. (I’m trying NLP to improve my patience and disciplin, and to be ateistich! (very good description regarding prophets and Gurus!!!))
Thanks
Btw, Douglas is good overall, but he says some things that He might reconsider. They are simply wrong. For example, he says that a buyer buys now because he believes he will probably not be able to buy lower. That is wrong. Many buyers will begin to buy when they think that the risk, reward, and probability make sense. That is often true when the probability is only 40%. Therefore, many buyers will buy when they believe there is a 60% chance that they can buy lower, but at the moment, there is a 40% chance of a reward that is much greater than the risk. That is a great trader’s equation, and many buyers will buy because there is a 40% chance that they will miss a great trade if they wait to buy lower, and that lower buy might not have as good a trader’s equation.
Al,
The CME group announced that they will introduce Micro E-mini futures for several indices, including the S&P, this May. In my experience, most if not all micro futures contracts do not have enough volume and therefore are not tradable on a 5 minute chart. Do you believe that the micro ES contract will have enough volume to provide 5-minute traders with price action similar to that on the 5-minute ES?
Thank you
Yes, but my concern is the one I mentioned in the chat room. If the commission is about $5 round turn, it will greatly limit the usefulness and therefore the volume. Most moves are only a few points. Traders cannot pay $5 to make only $10 – $15. Therefore, I suspect it will only be helpful for traders looking for 5 – 10 point moves, unless they can get the commission down to $1 – $2, which I doubt.
My ninjatrader all in round trip commissions are:
GC – $4.30
MGC – $1.70
6E – $4.50
M6E – $1.62
ES – $3.66
So, hopefully, the MES will be about the same, under $2 for a round trip.
Dear Al,
When I saw last week’s OD bar on the weekly chart I expected some degree of bearish follow through. Instead, the next bar was a strong bull bar which completely erased the bearish price action. Do you consider this a surprise bar in a tight bull channel that traders buy?
I also wonder if this “surprise” reversal has to be attributed to the (semi) randomness of the market?
Thank you!
Nothing is random. “Random” simply means a move on a time frame that you are not trading.
I wrote throughout February that the Emini would go sideways to down for 2 – 3 weeks. That is what has happened every other time in the past 20 years once there were 8 or 9 or more consecutive bull bars on the weekly chart.
I also wrote that there was a 10 bar bull micro channel and that traders would be eager to finally get a chance to buy below the low of the prior week. I said that therefore there would probably be at least a small reversal up within 2 weeks of going below the prior week’s low. Consequently, seeing the reversal up was not a surprise. However, the size of the reversal was.
Finally, I wrote that if there was a break above the October high, it would probably fail within a few weeks. This is because the Emini has been in a trading range for 16 months. Disappointment is more likely than a resumption of the bull trend.
I wonder if the S&P is in leg 4 of an expanding triangle on the Monthly & Weekly charts?
Yes, I mentioned that a couple times in recent posts. A reversal down from a new all-time high would do it.