Market Overview
The Emini formed a big outside down week this week. After 10 weeks without a pullback, this selloff will probably end within a couple more weeks.
The daily crude oil chart is forming a bull flag. A rally from here would be a 3rd leg up. That would be a wedge buy climax and probably lead to a test of $51 over the next 2 months.
The EURUSD daily Forex chart broke below the 4 month trading range. However, Friday reversed up, which creates confusion. The chart will probably be sideways for a few days before traders will conclude that the trading range will continue or a bear trend is underway.
Crude oil Futures market:
Slightly higher before pullback to $51
The crude oil futures daily chart has been in a tight range for 3 weeks. That small range is just above a bigger 4 week range. There is a Wall St. saying that a small range on top of a bigger range usually collapses back into that bigger range.
However, the 3 month rally has been exceptionally strong. In addition, the bears are failing to get consecutive big bear bars. Therefore, the 3 week range is probably a wedge bull flag. Traders should expect at least one more brief leg up to $60 over the next couple of weeks.
Since that would be a 3rd leg up, a reversal down after that would be a wedge top. Traders would look for a test of the beginning of the wedge bull channel. That is the January 14 low at around $51.
The huge reversal up after the extreme sell climax creates confusion. This typically leads to a trading range. Traders do not believe the rally will retrace the entire selloff.
They also believe that the bottom is in. They will therefore sell rallies and buy selloffs. This will probably result in a trading range between $40 and $60 to $65 for at least several months.
While a week or two of higher prices is likely, the daily chart will probably test down to $51 over the following 2 months.
EURUSD weekly Forex chart:
Weak breakout below the 4 month range
This week closed above the low of the range.
the 4 month trading range. The bulls also have a possible wedge bottom.
However, a 2 – 3 day bounce might form a bear flag next week.
The EURUSD daily Forex chart broke below the 4 month range on Thursday. However, Friday was a big bull bar and it closed on its high. It is therefore a buy signal bar for Monday. The bulls see the selloff as a wedge bottom with the January and February lows. Also, they want a failed breakout below the range.
This would be the opposite of what took place at the January high. There was a strong breakout above what was at the time the top of the range. The next day was a bear day. Then, the market sold off for 2 months.
Friday created confusion
Will the daily chart rally for 2 months? Unlikely. However, the strong bull day on Friday reduces the chances of a strong bear trend from here.
The chart will probably go sideways for a few days and then traders will decide if the trading range will continue or if a bear trend has begun. The bulls want a micro double bottom. In addition they need to see several strong bull trend bars over the next week.
Since the bears always want the opposite, they will try to prevent big bull bars from forming. In addition, they want any pullback to have a bear body closing near its low. That would then be a pullback from the breakout. They would sell below that bar, which would be a Low 1 bear flag sell signal bar.
Monthly S&P500 Emini futures chart:
Disappointing follow-through after 2 strong months
The monthly S&P500 Emini futures chart so far has a bear trend bar in March. I have been saying repeatedly over the past 2 months that the rally is strong, but it is still within a yearlong trading range. Furthermore, I said that March would probably disappoint the bulls who were hoping for a 3rd strong month. This is because trading ranges repeatedly disappoint traders.
The 2 month rally was surprisingly strong. When there is a pair of Bull Surprise Bars, traders expect a 2nd leg up. As a result, even if the Emini were to trade down for 2 months, the bulls would buy the selloff. A pullback from the 2 month rally is more likely that a lower high.
Head and shoulders top and bottom
The bears want the lower high. There would then be a head and shoulders top on the monthly and weekly charts.
However, a 2 month selloff that reverses up would create a head and shoulders bottom. Because the monthly chart has been in a trading range, there is always going to be both a credible buy and sell setup. But, in a trading range, the probability is never as high as traders want. The result is usually more bars in the trading range and not a breakout into a trend.
This is true even if this year’s rally makes a new all-time high. Most trading range breakouts fail. Consequently, there will probably be more sellers than buyers above the September high.
Markets have inertia and resist change. Therefore, traders should expect a continuation of the trading range for at least a few more months.
Weekly S&P500 Emini futures chart:
Outside down week and 1st pullback in 10 weeks
This is a minor reversal.
The weekly S&P500 Emini futures chart traded above last week’s high and then below its low. This week therefore is an outside down week. Since it is in a buy climax at resistance, it is a sell signal bar for next week.
However, it is the 1st pullback in 10 weeks. The bulls have been so eager to buy that they have not been waiting for a pullback. For 10 weeks, they were willing to buy above the low of the prior week. They now finally have a chance to buy below the prior week’s low. They will likely begin to take that opportunity within a couple weeks.
Bulls taking profits
This week formed a big bear trend bar closing on its low. That means that there were more bulls taking profits after the buy climax than there were other bulls buying below last week’s low. There were also bears selling, expecting a minor reversal down.
However, the bulls who did take profits are looking to buy again. They simply want to see how far down the pullback will go. Once the Emini stops going down, the bulls will begin to buy again.
After a strong rally like the one we just had, they typically will wait 2 – 3 weeks and then look to buy. Therefore, this pullback will probably last at least another week or two. Since the rally was so extreme, the pullback might even last a couple months. But, that is unlikely.
Bear trend or pullback?
There is always a bear argument. But, the probability is low, at least for several more weeks.
The bears are hoping that the rally was just a buy climax test of the December high and 2800. The Emini has tested 2800 many times for more than a year and has been unable to hold above it. They see the 2 month rally as the right shoulder in a head and shoulders top. The January 2018 high is the left shoulder.
When a micro channel lasts more than 5 bars, the odds are that the 1st reversal will be minor. The bulls will buy it. This bull micro channel lasted 10 bars. That is a sign of especially strong bulls. It increases the odds that the selloff is just a pullback, which will lead to a 2nd leg sideways to up.
If the Emini does continue down, it will probably find support around 2600. That was support many times over the past year. A reversal up from there would form a head and shoulders bottom.
What’s next?
Whenever there is a big outside down bar, there is an increased chance that the next bar will be an inside bar. That means next week might open above this week’s low and stay above the low all week. In addition, it would not go above last week’s high. If it has a bull close, it would be a buy signal bar for the following week.
The end of March has a bullish tendency, as does the end of every quarter. Therefore, a bull inside bar next week would probably lead to at least a week or two of higher prices.
This week was an unusually big outside down bar. In addition, it closed near its low and below last week’s low. It is a sign of strong selling. Therefore, next week could either gap down and sell off, or simply sell off.
But, the 10 week bull micro channel will probably draw bulls back in within a few weeks. Any selloff will probably form a higher low and lead to at test of this week’s high and 2800.
Daily S&P500 Emini futures chart:
5 day sell climax at support
The daily S&P500 Emini futures chart sold off strongly this week. I have been saying that a minimum goal was to dip below the February 5 high. The pullback was likely to overlap that most recent breakout point, and it did on Friday.
The selloff has been in 5 bar micro channel. When there are no pullbacks for 5 days, the first reversal back up usually fails. The bulls typically want to see at least a test of the low. That would create a micro double bottom.
A reversal up at that point would have a better chance of resuming the bull trend. Therefore, even if the Emini gaps up on Monday, the rally will probably form a lower high after a few days.
The 2 month rally was incredibly strong. It is important for traders to realize that the selloff might have ended on Friday.
Sell climax should end soon
The 2 month rally on the daily chart is unlikely to reverse into a bear trend without a better looking double top. In addition, there is a wedge bottom on the 60 minute chart. Therefore, even though the 5 day selloff has been surprisingly strong, the bears will probably begin to take profits early in the coming week. This will probably create a 1 – 3 day bounce.
Because the selloff was so strong, there will probably be at least a small 2nd leg down. Traders will look to sell a 1 – 3 day rally. But, the downside is minimal over the next few weeks. As I said above, it might continue down as far as 2,600, but the bulls will likely be happy to buy. They know the odds are that any selloff will be followed by another leg up.
30% chance of Endless Pullback or double top bear flag
There is a 30% chance that this week began either an Endless Pullback or a double top bear flag.
Endless pullback
An Endless Pullback is common after a parabolic wedge buy climax. In an Endless Pullback, the selloff is not particularly strong. It looks like a bull flag and not a bear trend.
Yet, it continues to add bars and work gradually lower. After 20 or more bars, there can suddenly be 2 – 3 big bear bars closing near their lows. That is a bear breakout below the bull flag.
If that happens, the pullback is converting into a bear trend. Those bear bars represent bulls giving up and bears selling aggressively. Traders then will see those bars as the possible middle of what is now a bear trend. There is often a measured move down.
Double top bear flag
Whenever there is a strong rally that stops at a prior lower high, traders have to wonder if the rally will form a double top with that lower high. If so, the pattern is a double top bear flag.
The rally is often surprisingly strong, and it is easy to conclude that there is a new bull trend. However, unless it breaks strongly above that earlier high (here, the December high), traders have to understand that the market can work below the neck line (the December low) and fall for about a measured move down.
A measured move down is around 1900, which is back in the 2015 – 2016 trading range. While the Emini will probably get there within 3 years, the odds are that the bulls will buy the current selloff. Furthermore, the yearlong trading range will probably continue for several more months before the bears can create a significant risk of a major selloff.
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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.
