Market Overview: Weekend Market Update
The Emini is trying to resume its strong bull trend, but a lower high is more likely. A reasonable target for the bottom of this correction is the February 11 high, which is the bottom of a gap up.
Crude oil has gone mostly sideways for 2 weeks after a buy climax. There will probably be a 2nd leg down. The March 1 high of 58.48 is a breakout point and therefore a strong magnet.
The EURUSD weekly Forex chart is in the channel phase of a yearlong Spike and Channel bear trend. There is no bottom yet. However, the odds are that there will eventually be a bull breakout and then a rally to 1.18 over the following many months.
Crude oil Futures market:
Trading range after buy climax before 2nd leg down
The crude oil weekly futures chart reversed down from a buy climax 3 weeks ago. The trend accelerated up 6 weeks ago and the bulls used the rally to take their surprisingly big profit.
Every bar since then has had prominent tails. That means that there were reversals up and down on the daily chart. Multiple reversals mean a lack of conviction. That is typical trading range price action. There is no sign that it is about to end. Consequently, traders should expect mostly sideways price action for at least a couple more weeks.
When a buy climax reverses, there will typically be at least 2 legs sideways to down. The reversal is caused by the bulls taking profits. They do not take profits in a prolonged bull trend if they intend to buy again a few bars later. They take profits because they think the pullback might be deep and last a long time.
Traders should expect at least a couple legs sideways to down. If the bears twice fail to create a bear trend, the bulls will begin to buy again. There has only been one leg down. Therefore, the odds favor a lower high and then a 2nd leg down. Friday might be the start of the 2nd leg down.
However, the pullback (bounce up) from the 1st leg down usually retraces more than half of the 1st leg down. Consequently the rally might continue up to 65 before the 2nd leg down begins.
Where will the bulls buy again?
Th March 25 low was a breakout test of the March 1 high. Also, the April 22 high was about a measured move up from the January 14 low to the March 1 high. Traders therefore believe that the March 1 high of 58.48 is an important price. That makes it a reasonable target for a 2nd leg down over the next couple months.
Can the bull trend resume without a 2nd leg down? Yes, but at the moment, the 2 week rally looks like a leg in a trading range and not a resumption of the bull trend. It therefore will probably lead to a lower high. Traders then have to be looking for targets below, like the March 1 breakout point.
EURUSD weekly Forex chart:
Yearlong bear channel with no sign of a change
The EURUSD weekly Forex chart had a strong reversal down a year ago. That breakout was a spike down. Over the past year, it has continued down in a bear channel. A Spike and Channel bear trend evolves into a trading range 75% of the time. That requires a break above the bear trend line.
The rally usually tests up to around the top of the start of the channel. That is the June 14, 2018 high of 1.1851. At that point, traders expect a test down and then a trading range. This process will probably take at about a year to unfold.
At the moment, there is no bottom. A bear channel can last a lot longer and fall much further than what traders might think is reasonable. Markets have inertia. They tend to continue what they have been doing. The EURUSD weekly Forex chart has been working lower in a bear channel for a year.
How does a bear channel end?
How does the channel end? There is a 25% chance of a strong breakout below and then a much bigger bear trend. More often, if there is a bear break below a bear channel, it will be the climactic end of the bear trend. It usually reverses up within 5 bars and then begins a bull trend.
Another type of bottom comes when the channel begins to go sideways for many bars, like it did for 5 months through April. The bulls look for a strong bull signal bar and then a rally above the bear trend line. There was no strong buy signal in that particular tight trading range and the bears got a bear breakout in April.
Another possibility is that the channel can end with a surprisingly big bull bar in the absence of a good buy signal bar. If the bar is big and closes far above the bear trend line, traders will conclude that the bear channel has finally ended.
Monthly S&P500 Emini futures chart:
Tight trading range, 2nd leg down likely
The monthly S&P500 Emini futures chart’s May candlestick has a bear bar and a big tail below. May traded below the April low and traders bought the selloff. This was likely after 4 consecutive bull bars closing near their highs.
However, by going below April’s low, there is less certainty of a new all-time high near-term. That confusion typically results in more sideways trading. After the 4 strong bull bars, most bears want at least a micro double top before looking for a swing down. That would take another month or two. Consequently, there is not much downside risk at the moment.
But, May had a big range, a bear body, and a break below last month’s low. Furthermore, there is now a perfect double top with the September all-time high. These factors reduce the chance of a new all-time high this month.
When the odds of a big move up and a big move down are less, the market usually goes sideways. That is what is likely for at least the next few weeks.
Weekly S&P500 Emini futures chart:
More sideways to down likely in pullback from double top
This week’s candlestick on the weekly S&P500 Emini futures chart had a big bull body after testing the 20 week EMA. But, the tail on top weakens it as a buy signal bar for next week. The doji bars of the 2 prior week also reduce the chance of a strong move up next week. Therefore the probability is against a strong rally next week.
Furthermore, its range is big. As a result, the stop for the bulls buying above this week’s high will be far below. They therefore will have increased risk, reducing the risk/reward ratio.
The buy setup for bulls looking to buy with a stop has lower probability and reduced risk/reward. This means that there is an increased probability and better risk/reward for bears selling above the buy signal bar. Consequently, while this week is a buy signal bar on the weekly chart, there might be more bears above its high.
When a signal does not look quite right, fewer traders take it. In addition, more traders do the opposite, betting that the signal will fail.
A weak signal creates uncertainty, and confusion is a hallmark of a trading range. Traders know that the Emini is searching for a bottom. They therefore are unwilling to sell too low or hold onto shorts. The bears prefer to sell rallies.
Also, the bulls are quick to get out of longs because they doubt any rally will go far. They do not want to be long at the top or buy too far above the low.
With both bulls and bears looking for quick profits, the Emini usually goes sideways. That is what is likely over the next few weeks.
Daily S&P500 Emini futures chart:
Probable lower high and then 2nd leg down
The daily S&P500 Emini futures chart reversed down from a double top with the September all-time high. The 2 week selloff was in a tight bear channel. When that is the case, the Emini typically will form a lower high and have at least a small 2nd leg down.
However, the combination of the big up move through April and the big down move in May creates confusion. Confusion usually leads to a trading range. Therefore, the Emini might go sideways for a couple of weeks before it begins its 2nd leg down.
Obvious targets for the bears are the bottoms of the pullbacks in the 4 month rally. Additionally, the February 11 high of 2723.00 is the bottom of a gap up, and it is just below the magnet of the March 25 low. Finally, the Emini might correct 50% of the 2019 rally. That target is 2651.00.
Even if the bears get a deep pullback over the next 2 months, the bulls will buy it. Moreover, the odds currently favor a break above the all-time high and a test of 3,000 at some point this year.
Small chance of break below December neck line of double top
Can the selloff continue down and break below the December low? That is the neck line of the September/May double top. If it did, traders would wonder if there would be a 600 point measured move down. That would be a 40% correction.
At the moment, the odds are only 20%. However, if the selloff continues and accelerates, the probability will go up.
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Al, as years go by, you have become like a father figure in my life. I don’t have the best relationship with my father, and sometimes it gets really hard for me to keep going, but just learning from you, day by day listening over and over again to videos, reading all your material and having you in my ear or back of my mind (I always try to put myself in your place, and question myself – “would Al take this trade, how Al would manage is trade etc.”) and it helps me. I really start to feel good and in piece with my life. I’m not looking to be the richest trader or drive the best car in town, all i’m trying to do is be happy with my life. As you say, you don’t need to be great, everything you need to do is to be constantly good. And i’m on my way.
Al,
You say the bears need a S signal bar to begin a second leg down on the daily ES chart. Friday seems to fit the bill. While it did have a bull body, there was a big tail and the close was in the lower half of the bar. Appreciate your thoughts.
With so many bull bars over the past few weeks and the strong trend on the monthly chart, I think most traders who want to sell with a stop on the daily chart would prefer to see a bear bar closing on its low. I suspect they will not get it. Instead, the daily chart might just drift lower, or there might be a big bear Surprise Bar. Because a trading range over the next month is most likely, this bear leg will probably not have a good stop entry for the bears. I would not sell below a bull bar, even though I think the odds favor a 2nd leg down. But, it is reasonable to sell strong rallies on the 60 minute chart. For example, buying puts on rallies makes sense.