Market Overview: Weekend Market Update
The Emini had a 1st leg down from a parabolic wedge buy climax on the daily chart. It might have one more leg sideways to down. But the monthly oo buy signal still makes it likely to go sideways to up for at least a couple more months.
Crude oil futures are in a yearlong trading range. They sold off sharply this week from the sell zone above 60. They are now in the buy zone at around 55, but will need a micro double bottom before another test of 60.
The EURUSD Forex market is trying to break above its yearlong wedge bear channel. If this rally breaks above the June high, it will probably test the January high at around 1.18.
Crude oil Futures market:
Strong reversal down from wedge rally
Crude oil futures sold off strongly this week. Despite so many pundits on TV last week talking about a bull trend, I said that the rally was a bull leg in a yearlong trading range. Furthermore, I said it was in the sell zone above 60.
This week’s selloff was surprisingly strong. When there is a Bear Surprise there is usually at least a small 2nd leg sideways to down. Consequently, traders will sell the first 1 – 3 day rally to around the 20 day EMA, which would be about a 50% pullback.
It is now in the buy zone around 55 formed by the July 3 low and the June 10 high. The bulls will probably need at least a micro double bottom before traders will look for the next leg up. Crude oil is now forming a smaller range between 50 and 60 within the yearlong trading range between 43 and 79. Keep looking for for reversals.
Yearlong trading range so bet on reversals
It is important to understand what I mean when I continue to say that the chart has been in a trading range and it will probably continue all year. Trading ranges have legs up and down. They often become stronger after 5 – 10 bars. But they trap traders into buying high and selling low.
It is natural to hope for a trend. However, markets have inertia. They have a strong tendency to continue to do what they have been doing. Since the crude oil market has been in a trading range, buying strong rallies and hoping for a bull trend, or selling strong selloffs and expecting a bear trend is the wrong approach. It is better to buy low and sell high.
Additionally, a trader will make more money taking profits when there is a strong move in his direction. Bulls should exit on strong rallies and bears should take profits on strong selloffs.
The probability favors reversals. Obviously, there will be a trend at some point. A trader will make more money trading it like the trading range that it is instead of trading like the trend that it is not.
EURUSD weekly Forex chart:
Head and shoulders top and bottom so Breakout Mode
The EURUSD weekly Forex chart had 3 closes above the 20 week EMA in June. That was the 1st time this has happened in a year. Furthermore, the June rally broke above the bear trend line at the top of the yearlong wedge bear channel. Traders are now deciding if the 4 week selloff is a failed breakout and the resumption of the bear trend or simply a pullback in an early bull trend.
Well, it is both. If the rally continues, traders will say that the selloff was a pullback in a bull trend that began in May. Alternatively, if the selloff continues to below the May low, traders will say that the rally was a bull trap in a yearlong bear trend. Traders need more information, which they will get over the next few weeks.
Traders need more information
What should traders do now? The buy setup is minimally better than the sell setup and therefore being long might be a little better than being short. It is basically 50 – 50.
On the daily chart, there is a small double top and a small double bottom over the past 3 weeks. It is in the middle of a 5 month trading range. There is both a head and shoulders bottom and a head and shoulders top. Since there are higher lows and lower highs, the past 5 months have formed a triangle.
This is a Breakout Mode pattern. Traders know that there is a 50% chance that the 1st breakout up or down will fail. They also believe that the chance of a successful bull breakout is about the same as for a successful bear breakout.
It is reasonable to wait for the breakout and maybe until after the FOMC announcement on July 31. If the bulls break above the June high, the rally will probably test the January high just above 1.18.
The bulls need to begin to get consecutive big bull trend bars or at least 3 or more small bull bars. Without that, traders will assume that the 5 month trading range is continuing. If the bulls demonstrate clear control, the rally will probably go above the January high of 1.1816.
What happens if the bears get their break below the May low? Look back at every other new low over the past year. Each was brief and it was followed by a rally. Traders will assume that there will be buyers below the May low, despite the head and shoulders top on the daily chart.
Monthly S&P500 Emini futures chart:
Emini expanding triangle top and weak monthly oo buy signal
The monthly S&P500 Emini futures chart in July triggered a buy signal by going above the June high. June was the 2nd consecutive outside bar on the monthly chart. Because July went above its high, there is a 60% chance of 3 months of sideways to up trading.
July so far has a small range. The bears want it to close near its low. Furthermore, they want the range to be big. July would then be a sell signal bar for a failed breakout above the oo (consecutive outside bars).
Expanding triangle top on the weekly and monthly charts
In addition to the possible failed breakout, I have been talking about a possible expanding triangle top all year. I said that if the Emini broke above the September 2018 high and reversed, there would be an expanding triangle top sell signal.
I still believe it will happen. But there is still room to the trend line above the January 2018 and September 18 highs. It is a magnet above. Also, the oo buy signal probably will result in higher prices.
Consequently, at the moment, the Emini is still likely to go higher. I have been saying that it might overshoot the line by 1 – 2%. That means traders will me more concerned about a top between 3050 and 3150.
Weekly S&P500 Emini futures chart:
Sell signal bar, but bad context for a selloff
The weekly S&P500 Emini futures chart formed a bear trend bar this week. This is a sell signal bar for a failed breakout above the September/May double top and for the 19 month expanding triangle top. However, the tail below is prominent and there is a 7 week bull micro channel. This is a weak sell setup.
Traders want to know if there will be a major reversal. They expect next week to break below this week’s low and trigger the weekly sell signal. They then will decide if the sell signal will result in a major or minor trend reversal.
A minor trend reversal means a 1 – 3 week pullback, which would be a bull flag. That would then lead to a test of the high.
A major reversal is a bear trend. Traders would expect it to undo the June rally and test to around 2700.
It is important to note the importance of the bull micro channel. Every low for the past 6 weeks has been above the low of the prior week. This buying pressure is a sign of strong bulls. When there is a 7 bar bull micro channel, the bulls typically will buy the 1st 1 – 3 week reversal down. Therefore, if the sell signal triggers next week by the Emini breaking below this week’s low, the selloff will more likely be a 1 – 3 week bull flag than the start of a bear trend.
Daily S&P500 Emini futures chart:
After Bear Surprise Bar, small 2nd leg down likely
The daily S&P500 Emini futures chart had a surprisingly big bear bar on Wednesday. A Bear Surprise Bar traps bulls into a bad long. Many bulls who bought higher now wished they had not. They now hope for a bounce so that they can exit with a smaller loss. It also traps bears out of a good short. Many bears missed the short and want a 2nd chance.
With both the bulls and bears looking to sell the 1st rally, the Emini reversed down on Friday. That might be the start of a 2nd leg sideways to down. Furthermore, the Emini might continue its 3 week trading range into the July 31 FOMC meeting.
However, this week’s reversal up was strong, as is the the 2 month bull trend. There is currently at least a 40% chance that the rally will continue up to a new high without a small 2nd leg sideways to down.
Remember, I have been talking about the parabolic wedge buy climax for several weeks. I said the minimum goal was a couple legs sideways to down. I also said that the selloff might last a few weeks. Finally, I said that the targets for the bears are the higher lows in the month-long wedge bull channel. If Friday’s reversal down continues on Monday, traders should expect the pullback to end around 2900 – 2950.
Wedge top often leads to head and shoulders top
When there is a wedge top, traders expect at least a couple legs down. The pullback from the 1st leg down is often the right shoulder of a head and shoulders top.
That will probably happen here if this rally stalls next week. The bulls will probably get a 3 – 5 day bounce. If the Emini reverses down from a lower high, traders will sell, expecting a head and shoulders top.
It would also be a lower high major trend reversal. But it is important to remember what I often say about major reversals. They only have a 40% chance of leading to an actual trend reversal into a bear trend. More often, they lead to a trading range. Consequently, that is the best the bears should expect over the next few weeks. The monthly chart continues to make higher prices likely for the next 2 months.
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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.
Should the first sentence on the daily analysis be: The daily S&P500 Emini futures chart had a surprisingly big bear bar on Wedneday?
Yes, certainly a typo there and now fixed. Many thanks.