Market Overview: Weekend Market Update
The Emini is accelerating up and it is above the top of the daily, weekly, and monthly bull channels. There is a 60% chance that 5% correction will start within a few weeks.
The 30 year bond futures market is oversold and will probably bounce over the next couple weeks.
While the EURUSD has had its strongest rally in 2 years, it is still in a bear trend. However, it also has been in a trading range for 6 months and traders are continuing to look for reversals every 2 – 3 weeks.
30 year Treasury bond Futures market:
Monthly chart might bounce for 2 months
The 30 year Treasury bond futures has been sideways for 3 months. Because the monthly chart had 4 consecutive bear bars, a bull bar in January is less important than it otherwise would be.
Last year rallied in a parabolic wedge buy climax on the monthly chart. Traders therefore expect at least a couple legs sideways to down before the bulls will be willing to buy aggressively again.
After 4 bear bars, most bulls will want at least a small 2nd leg down before buying. Consequently, even though January will probably be a High 1 buy signal bar, traders expect only a 1 – 2 bar bounce. There will probably be sellers above. The monthly bond chart should form a lower high and have at least a small 2nd leg sideways to down after a 1 – 2 month bounce.
Transitioning into 10 – 20 year bear trend
I have mentioned many times over the past several years that the bond market has a nested wedge top on the monthly chart. This will probably lead to a 10 – 20 year bear trend.
However, I have also said repeatedly that a top on the monthly chart can take several years to complete. While the bonds transition from a bull to a bear trend, there still can be new highs. But the new highs will probably be brief.
At some point, there will be a strong enough selloff to create a consensus that the bonds have entered a bear trend. The monthly chart is still in transition. But, there is a 60% chance that the bond market is in the early stage of a 10 – 20 year bear trend. This is true even if there are a couple more minor new highs over the next year or two.
EURUSD monthly Forex chart:
Weak bear flag
The EURUSD monthly Forex chart has been in a bear trend for 2 years. However, the EURUSD has rallied for 4 months. This is the longest rally in the bear trend.
The bear channel has been tight since it began in June or September 2018. A tight bear channel typically has to transition into a trading range before it can reverse into a bull trend.
The 4 month rally broke above the top of the bear channel, which means the bear trend line. But the breakout has been small and the rally has lacked consecutive bull trend bars. It looks more like a bull leg in a trading range or in a bear channel than the start of a bull trend.
Sometimes a break above a bear channel only lasts a few bars and then the bear trend resumes. The result is a broader, flatter, weaker bear channel. Traders then conclude that the attempt to evolve into a bull trend has failed.
Early bull trend or bull leg in broader bear channel?
The monthly chart is currently in a transition phase. Traders need more information before they conclude that these 4 months are the start of a bull trend or simply a bull leg in a broader bear channel.
At the moment, the rally looks more like a bull leg in a bear channel than the start of a bull trend. However, there are still 2 weeks left to January. If the bulls are able to get the month to close on its high, January would be the 2nd consecutive bull candlestick on the monthly chart. That would be the 1st instance in 2 years and it would increase the chance that the bear trend has ended.
Monthly S&P500 Emini futures chart:
Extremely strong rally, but possibly too far and too fast
The monthly S&P500 Emini futures chart has rallied strongly for 5 months. There is no sign of a top. This month so far is at the high. This is an extremely strong bull trend. But traders are wondering if it is too strong.
This increases the chance of some profit-taking coming soon. But when a trend is strong like this, traders will buy the 1st 1 – 2 bar pullback. Consequently, the downside risk in terms of the duration of a selloff is small over the next few months.
However, there have been several 1 – 2 month pullbacks over the past 2 years where the Emini fell about 10%. Therefore, while a pullback might not last long, it could be relatively sharp. In fact, there will probably be at least one or two 5 – 10% pullbacks in 2020.
But currently, there is no credible top and traders are continuing their buying. Also, they will buy the 1st pullback on the monthly chart.
The 2020 candlestick on the yearly chart will likely be neutral
It is important to remember what I said in early January about the yearly chart. By a yearly chart, I mean a candlestick chart where each bar is one year. I discussed it in a video. If you go to the video, I begin to talk about it at 1 minute and 46 seconds.
I said that 2019 was a huge bull trend bar closing near its high. It was the biggest bull bar in a 10 year rally. When the biggest bull bar comes late in a bull trend, it typically attracts profit-taking. The next bar is usually not another big bull bar. More often, it is a neutral bar or even a bear bar.
A neutral bar is one that closes somewhere in the middle third. That means that the bar has a conspicuous tail on the top and on the bottom.
The tail on the top comes from a rally and then a selloff. Traders should therefore expect that there will be a selloff back to around the open of the year at some point this year. Also, if the selloff falls continues far below the open, there will probably be a bounce late in the year so that the year will close somewhere in the middle third of its range.
Weekly S&P500 Emini futures chart:
Emini 5% correction could begin in 3 weeks
The weekly S&P500 Emini futures chart has been in a bull breakout for 4 months. There have been 2 brief pullbacks, but most of the candlesticks have had a big bull body and a close near the high of the bar.
There is no sign of a top. The bears typically will need at least a micro double top or consecutive buy climaxes before they can get more than a 2 week selloff. Since both patterns require at least a few bars, the downside risk over the couple weeks is small.
Why a pullback should begin in about 3 weeks
Everyone knows that the rally is unusually strong and it has lasted a long time. Traders are looking for a reason to take profits. The weekly chart is giving them one.
The past 2 weeks formed the strongest breakout in the 4 month bull trend. It is providing the bulls with a great price for profit taking. Many bulls will probably soon take advantage of this opportunity because they will be afraid that it might be brief.
The 2 most recent bars have surprisingly big bodies and closes near their highs. When there is a Surprise Breakout late in a bull trend, there is a 60% chance that it is the end of the current rally or that the rally will have one more final leg up. More often than not, there is a 1 – 3 bar (week) pause or pullback from the 2 bull bars and then a 1 – 2 bar final rally.
That 2nd leg up typically exhausts the bulls. The exhausted bulls take profits and the aggressive bears short. The result is usually at least a 10 bar pullback that has at least 2 small legs.
What to expect over the next month
The Emini will probably pause for a week or two, have one more 1 – 2 week surge, pull back for a month or two, and then resume up to at least the old high.
At that point, the picture gets confused. Confusion typically results in a trading range. The bulls want the bull trend to continue indefinitely and the bears might will try to create a double top and a major trend reversal. They will probably alternate control over several months before one side wins.
From what I wrote above about the yearly chart, traders should also assume that the Emini is creating most of the year’s gains in the 1st quarter. A buy climax usually leads to a lot of trading range trading. Traders should expect many months of sideways trading this year.
Why should traders expect the pullback to fall about 5%?
A common target for a pullback after a buy climax is the bottom of the most recent leg in the bull trend. That is last week’s low of 3213.25, which means about a 5% correction. It could be more and it could last longer, but that is a reasonable objective.
It is important to note that the Emini is above the top of the daily, weekly, and monthly bull channels. Traders typically take profits above bull channels. That is another reason to suspect that this rally will soon stall.
Obviously, if the Emini continues up without a pause, it could go a lot higher. However, this setup is similar to the pattern of January 2018. That is why in mid-January 2018 I wrote that traders should expect at least a 5% correction beginning within a couple weeks. The Emini fell 10% over the next month.
Daily S&P500 Emini futures chart:
Breaking above top of bull channel so possible blow-off top
The daily S&P500 Emini futures chart has been in a Small Pullback Bull Trend for 4 months. The bull channel is tight and every pullback has lasted only 1 – 3 bars (days).
The bull trend accelerated over the past week. The rally is breaking above the top of the tight bull channel.
Can this breakout be the start of an even stronger bull trend? That happens only 25% of the time. More likely, it will be an exhaustive move. That is also called a blow-off top.
Until there is a reversal, the odds continue to favor higher prices. However, there is a 75% chance that a bull breakout above a bull channel will begin to reverse back down within about 5 bars.
This week’s star doji could be the start of the pullback. A gap down next week would create an island top with Friday’s gap up. But remember, most island tops lead to pullbacks and not bear trends.
1st selloff will probably be brief
If next week pulls back, it will create that 1 – 2 week pause on the weekly chart that I discussed above. The weekly chart will then probably have one final 1 – 2 week push up before a 5% correction begins.
A reasonable target for a pullback next week is the middle or bottom of the tight bull channel. That is around the bull trend line. The bull trend line is around the 20 day EMA, which was support in early December and again in late December. There will probably be some support there again this time. Remember, there will probably be one more 1 – 2 week rally after a 1 – 2 week pullback.
While the odds of a pullback are growing, this is a very strong bull trend. There is no sign of a major top. Traders should assume that the market will be higher a few months from now. A 5% correction is a minor reversal and not be the end of the bull trend. But it might be the start of a trading range.
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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 Market Update page.