Market Overview: Weekend Market Update
The Emini has been sideways for 4 months. Traders expect an eventual bull breakout because of the bull trends on the weekly and monthly charts.
The 30 year Treasury bond futures market had a buy climax in August. It will probably be sideways for at least several more weeks.
The EURUSD weekly Forex chart is reversing up from the bottom of nested wedge bear channels. This should continue for several more weeks, but the rally will probably lead to another lower high.
30 year Treasury bond futures market:
Developing trading range after extreme buy climax
The 30 year Treasury bond futures weekly chart reversed down strongly in September after a buy climax in August. Big Up, Big Down typically creates Big Confusion. Since confusion is a hallmark of a trading range, traders should expect more sideways trading. The rally of the past 3 weeks tested the August high, but failed. This week reversed back down.
While the bulls regained most of the August loss, they have been unable to break to a new high. When there is a surprising strong selloff from a buy climax, traders expect at least a small 2nd leg sideways to down. This week is the start of that leg.
Surprises trap traders in and out
Why do surprises trap traders? Because a surprise means a low probably event took place. That means many traders were on the wrong side. They used this rally to fix their positions.
The trapped bulls who bought at the August high were relieved to be able to exit around breakeven. That means there were bulls selling the rally. Other bulls bought the selloff in early September, expecting the reversal down to be minor. They now expect a trading range and therefore took profits around the top of the range (currently, the August high).
Bears are always looking to sell. Many missed the August 28 short and therefore were trapped out. They know that bulls would sell a bounce to around the August high. Consequently, the bears expected at least a small pullback from the bulls exiting near the August high. They sold as well.
Buy zone is near the September low
There are probably enough bulls and bears selling around the August high to limit the upside near-term. The bulls want to buy again, but since the weekly chart is now probably evolving into a trading range, the bulls want to buy at support. Support is around the September 13 low and the July 12 low at the bottom of the August buy climax.
The September 13 low is the neckline of the August/September double top. But since a trading range is likely, the bears will probably not get a measured move down. Instead, there will probably be another bounce from the support zone.
EURUSD weekly Forex chart:
Weak reversal up from bottom of nested wedge bear channels
There is a nested wedge bottom on the EURUSD weekly Forex chart. Also, last week was a bull bar closing near its high, making it a buy signal bar. It was a reversal up from the bottom of the wedge bear channels.
This week triggered the buy signal by trading above last week’s high. This week was the entry bar and it had a bull body. The bear rally should reach the 20 week EMA and possibly the top of the bear channel over the next few weeks.
Reversal up in tight bear channel is usually minor
Even if a strong reversal up develops over the next few weeks, it will probably be minor. There are several reasons for this. First, the 2 year bear channel is tight. Traders expect that the 1st breakout above a tight bear channel will be minor. That means it would form a bear flag or lead to a small trading range, and not a bull trend.
Next, look to the left. All of the many prior reversals over the past 2 years formed lower highs and led to new lows.
Finally, there are 2 measured move targets near 1.08. Also, there is a gap there as well. That makes 1.08 a magnet below.
Monthly S&P500 Emini futures chart:
4 month tight trading range at top of 22 month trading range
The candlestick on the monthly S&P500 Emini futures chart so far this month is a small bear doji. With the strong reversal up over the past 2 weeks, this month might go above last month’s high. This month would then be an outside up month. That would increase the chance of higher prices in November.
But the Emini is at the top of its 22 month trading range. It has been in a tight trading range for 7 months. That range has been particularly tight for 4 months. This is a Breakout Mode pattern. Since these nested trading ranges are within a 10 year bull trend, the odds eventually favor at least slightly higher prices.
Will the bull breakout reach a 700 point measured move up based on the height of the 22 month range? Probably not. Ten years is more than 100 bars and that is a long time for a strong bull trend. When there is a trading range late in a bull trend, it typically becomes the Final Bull Flag. That means the bull breakout usually fails after 5 – 10 bars (here, months), and then the Emini returns to the trading range. Traders would then expect the selloff to test the bottom of the range. A Final Bull Flag reversal has a 40% chance of leading to a bear trend and not just a test of the bottom of the bull flag.
The 22 month trading range is also an Expanding Triangle top. But there is no good sell signal bar nor strong reversal down yet. Consequently, traders correctly continue to expect a new high within a few months.
Weekly S&P500 Emini futures chart:
Small bull bar after 3 bear bars
The weekly S&P500 Emini futures chart is in the middle of 4 month trading range. September formed a lower high double top with July. Last week’s low is a higher low double bottom with the early August low.
When there is both a double bottom and a double top in a trading range, the chart is in Breakout Mode. Traders typically expect that the chance of a bear breakout to be about the same as for a bull breakout.
Here, there have been higher lows all year and no lower lows. Also, there have been conspicuous tails below the bars over the past month. Traders are buying selloffs. These factors make a bull breakout more likely.
While this week was a bull candlestick, it followed 3 consecutive bear bars. That reduces the chance that this week’s rally will continue straight up to a new high. But if next week is also a bull bar closing on its high, the bulls will probably get their new high by the end of the month.
Daily S&P500 Emini futures chart:
Emini 2nd leg up from October bear trap
The daily S&P500 Emini futures chart on Friday broke above the 4 week bear channel. But the close near the low and the double top with last week’s sell climax high reduce the chance of an immediate strong breakout to a new high. This is trading range price action and it makes some sideways trading likely next week.
There have been several reversals over the past 2 weeks. The Emini has been back in the August trading range for the past 2 weeks. In August, there were dramatic reversals for almost the entire month. Ultimately, the bulls got a breakout above that range.
On Friday, the bulls again broke above that August trading range. If the bulls get more bull trend bars next week, the breakout will be successful. They they will try for a new all-time high.
Since June, I have been saying that the bulls would probably get their new high in September or October. They are now trying again.
However, the Emini is still in a 4 month trading range between 2800 and 3000. Until there is a breakout, there is no breakout. The bull trend on the higher time frames helps the bulls. Also, the strong reversal up from the bear trap last week helps as well.
But the lower high in September is good for the bears. So is the expanding triangle top on the weekly chart. They will try to stop this rally around the September lower high just above 3000.
If the bulls get several bull bars closing near their highs next week, the rally will probably continue up to a new high. If instead the bull bars have prominent tails or there are 2 or more bear bars, the Emini will probably stay sideways for at least another week.
What about China?
I trade based on chart patterns and not news. However, sometimes the news can overwhelm the patterns and create a surprisingly strong breakout up or down.
The market has been waiting a long time for a trade deal with China. A partial agreement might come over the weekend. That could lead to a big gap up or down next week.
No one knows how much has already been priced into the market. It is also impossible to know if the market will see a deal as bullish or bearish. Finally, the initial reaction could be wrong. A big gap up or down could quickly reverse.
Traders have to be ready for anything, and they should trade in the direction of strength. Do not waste time trying to analyze the news. Just trade what the charts are doing. They show the consensus opinion of the institutions. Your opinion or the opinion of some TV scholar is irrelevant.
Emini extreme intraday volatility increases chance of October big move
Anyone watching the Emini intraday this week was struck by several unusually big, fast moves. The chart above shows 2 examples from Friday. That is a 5 minute chart of the Emini. The 2 inserts are 1 minute charts that show what took place during the two 5 minute bars that I highlighted.
It is extremely unusual for the Emini to move 5 or more points in 1 second. Yet, this happened many times this week.
What does it mean? First, it means some firms quickly made a lot of money and others lost. The losing firms will change their algorithms to prevent this from continuing to happen. That will prevent more of these moves near-term.
However, surprises breed other surprises. Each of the huge moves this week reversed. Traders therefore expect future ones to reverse as well.
Whenever something is obviously likely, it is not as likely as it appears. What would happen if the 5 point selloff in 1 second was followed by another and then another? We could see a Flash Crash, like on May 6, 2010. The Emini fell almost 9% in 23 minutes. That would be about 250 points today.
While the odds are against it, traders should not dismiss something unusual as an irrelevant outlier. Everything matters, and the market might be telling us to expect something big in the next few weeks.
Traders can see the end of the day bar-by-bar price action report by signing up for free at BrooksPriceAction.com. I talk about the detailed Emini price action real-time throughout the day in the BrooksPriceAction.com trading room. We offer a 2 day free trial.
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.