Market Overview: Weekend Market Analysis
The SP500 Emini futures market has been in a strong bull trend for a year. The recent streak of 13 consecutive bull bars increases the chance of at least a 10% pullback lasting a couple months coming this summer. This week is a sell signal bar on the weekly chart (5 bears bars on daily chart). If next week sells off, then traders will begin to think that a 10% correction is underway.
The EURUSD Forex chart formed a big bull bar in April, but it is near the top of a 7-year trading range. While the market might rally more in May, it will probably stay within the range for at least a couple more months.
EURUSD Forex market
The EURUSD monthly chart
- March was a big bear bar on the monthly chart.
- I will show the weekly chart next week, and I show the daily chart in my daily blogs. Today was a big Bear Surprise Bar on the daily chart, which increases the chance of lower prices next week.
- On the monthly chart, April was a big bull bar that totally reversed March.
- April broke above the March high, but closed just below the March high.
- The bulls see April as a reversal up from a double bottom bull flag with the November low.
- They want the 3-month selloff to be just a pullback, from the 2020 rally up from the March 2020 higher low major trend reversal.
- The bears want a lower high and a 2nd leg down from last year’s wedge rally. That is still more likely than a bull trend.
Trading range for 7 years
- The monthly chart has been in a trading range for 7 years (since February 2015, but the chart above only shows 4 years).
- Trading ranges regularly disappoint bulls and bears. The close below the March high is disappointing to the bulls, which is a reminder that the yearlong rally has not yet broken out of the 7-year trading range.
- Every trading range always has both a reasonable buy, and a reasonable sell setup. The bulls have a double bottom bull flag with the November low. The bears have last year’s wedge top and they want a 2nd leg down.
- The probability of the direction of the breakout never gets much above 50%. When there is a big bear bar or two, the odds go up slightly for the bears. When there is a strong bull bar, like in April, the odds go up slightly for the bulls.
- Trading ranges resist change. Until there is a breakout there is no breakout.
- Until there is a breakout up or down, a strong leg up or down is more likely to reverse, than grow into a trend.
- While April is bullish, as was last year, the bulls need a couple closes above the February 2018 high before traders will look at this rally on the monthly chart as a bull trend.
- The bears see the January high as forming a double top with the 2018 high. They hope April is just another test of the top of the 7-year trading range.
- The bears need a strong sell signal bar this summer before traders will look for a swing down.
What to expect in May
- I said that the monthly chart is near the top of its 7-year trading range. It has also been in a small trading range for 9 months.
- With April being a big bull bar, traders might expect May to trade at least a little higher. But, it probably will not break out of the 7-year range. In fact, the odds are against it closing above the January high.
- There will probably be a month or two down, starting within the next couple months.
- Traders should expect the 9-month range to continue for at least a couple more months.
- There is only a 30% chance that May will be a 2nd consecutive big bull bar closing near its high.
- When a chart is not clearly bullish or bearish, it is in a trading range. Traders know that a reversal every few months is more likely than a move growing into a trend.
S&P500 Emini futures
The Monthly Emini chart
- Consecutive big bull bars closing near their highs.
- Normally, next month should trade at least a little higher. But because of weekly and daily charts (see below), May might not continue up.
- Every low for 7 bars (months) has been above the low of the prior month.
- This is an 8-bar bull micro channel and it is a sign of aggressive buying. Traders will buy the 1st 1- to 2-month pullback.
- It is also unsustainable. That means it is a buy climax. A buy climax typically attracts profit takers.
- There are 3 legs up since the September low. That is a parabolic wedge buy climax, and it often attracts profit takers.
- Buy climax can continue far longer than what might seem reasonable. However, the acceleration up over the past two months increases the chance of some profit taking soon.
The Weekly S&P500 Emini futures chart
- Bear reversal bar after 5 consecutive bull bars. This week is a sell signal bar for next week.
- There have not been more than 5 consecutive bull bars in the yearlong bull trend, so this is an extreme buy climax. This increases the chance of profit taking soon.
- Stop for many bulls is below the March 4 low, which is far below.
- Easiest way to reduce risk is to reduce position size by taking some profits.
- Once enough bulls start to take profits, there will be a 2- to 3-week selloff.
- Yearlong rally has been a Small Pullback Bull Trend, which usually does not last much longer than 50 to 60 bars.
- Current rally has lasted more than 50 bars, so increased chance of it transitioning into a trading range for a couple months.
- Small Pullback Bull Trend is a very strong bull trend. Traders want to buy the 1st 10% pullback.
- It usually does not reverse into a bear trend. It typically evolves into a trading range. Once there is a trading range, the bears would then have a 40% chance of a trend reversal down.
- Because the buy climax is extreme, many bulls will not look to buy again until after a 2nd leg sideways to down, like September and October last year.
- Therefore, while the initial selloff might only be 3 weeks, the Emini might go sideways for a couple months.
- Since bull trend has been accelerating up for 2 months, increased chance that this is a blow-off top.
- That typically leads to a deeper and longer pullback. Therefore, once there is a pullback, it could be more significant than in September and October 2020. There is a 30% chance it could be 20% and last several months.
The Daily S&P500 Emini futures chart
- Strong Small Pullback Bull Trend since March 25.
- Markets resist chance. While there is an extreme buy climax, the odds always favor higher prices until there is a strong reversal down. By the time traders conclude that a correction is underway, it is usually already about half over.
- This week had 5 bear bars (consecutive doji bars). This is very unusual and it increases the chance of a reversal down next week.
- 9 of the last 11 bars had small bodies or big big bear bodies. This represents early profit taking, and it increases the chance of a bigger pullback beginning soon.
- Most important chart pattern for the bears is the streak of 13 consecutive bull bars, which ended April 16.
- That is the most extreme streak in 10 years. The last similar streak was 15 bars back in February 2011. It led to an immediate 9% selloff. After a brief new high, there was a 24% correction.
- The point is that an extreme streak often leads to a correction that is bigger, and lasts longer than recent pullbacks. Therefore, once there is a reversal down, it will probably be at least as big as the 10% from September and October 2020, and it might last longer.
- If there is a 20% correction, there might not be another new high this year.
- I mentioned in the trading room on Wednesday just after the open that I shorted and plan to scale in 50 to 100 points higher.
- Picking the exact top in a strong bull trend is a low probability task. The odds always continue to favor at least slightly higher prices when the Emini is in a strong bull trend. However, It is currently more likely that the next 10% move will be down than up.
- March and April are the most bullish consecutive months of the year. They were very strong this year.
- That probably increases the chance of the next seasonal tendency, which is a pullback in May and June. A common trading adage is “Sell in May and go away.”
- Do not place trades based on calendar patterns. They are not reliable enough, and there are many other far better setups to trade.
- Bottom line… streak of 13 bull bars, 2 weeks of weak bars, and 5 consecutive bear dojis increase the chance of a 10% pullback beginning in May. If there is a strong reversal down next week, it would probably be the start of a 10%, 2-month correction.
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Charts use Pacific Time
When I mention time, it is USA Pacific Time (the Emini day session opens at 6:30 am PT, and closes at 1:15 pm PT). You can read background information on the intraday market reports on the Market Update page.