Market Overview: Weekend Market Update
The S&P Emini rallied strongly from a 2 day bear trap. The bears now want a double top, but sideways to up is more likely.
Bond futures are drifting down from a buy climax. They will probably be sideways to down for many months.
The EURUSD Forex market is in a 4 day tight trading range in the middle of a 5 month trading range. More sideways price action is likely.
30 year Treasury bond Futures market:
Weak reversal down from buy climax
The 30 year Treasury bond futures reversed down from a yearlong parabolic wedge top in September on the monthly chart. September and October were consecutive inside bars. They formed an ii (inside-inside) sell signal. November triggered the sell signal when it traded below the October low.
However, the bond market has been sideways since August. While the sell setup was credible, both inside bars had big tails below. They represent traders buying dips. The November entry bar also had a big tail below. In addition, November closed above the October low, despite the big selloff early in November. This is not how bear trends typically begin.
When a parabolic wedge rally is very tight, like this on, the reversal usually is more of a pause than a reversal. The pause sometimes lasts 10 or more bars. Since this is a monthly chart, it could go sideways in a tight range for a year.
Bull flag or developing top?
The bulls see the 4 month pullback as a bull flag. And it is. But 3 or 4 bear bars makes it a weak buy setup.
Also, there was a nested wedge top in 2016. That is a reliable pattern. I have been saying that a trend reversal on the monthly chart can take years. Even though August broke above the top of the 2016 nested wedge, it is still more likely just part of the topping process than a sign that the top will fail.
Americans will not tolerate negative interest rates. I talked about this several times. That limits how far up bond futures can realistically go (low rates mean high bond prices). While they have not yet begun to go down, it is much more likely that they will eventually go down before continuing up much higher.
But the bears might need to stop the bulls for a year or more before they are able to take control. In the meantime, traders will expect a continuation of the 4 month trading range.
EURUSD weekly Forex chart:
Weak rally after higher low major trend reversal
The EURUSD weekly Forex chart reversed up this week from a small higher low. But last week was only a doji bar, which is a weak buy signal bar. Although this week had a bull body, there was a big tail on top. Therefore, the EURUSD will probably stay in its 4 week trading range for at least another week.
Since the October rally was the strongest rally on the weekly chart in 2 years, the bulls expect a 2nd leg up. This is especially true since the reversal up on October 1 was from a nested wedge bottom. The bulls hope that this week was the start of that 2nd leg up. However, sideways is more likely than up for next week.
The 1st target for the bulls is the October 21 high, which was the top of the 1st leg up. It is also around other targets, like the 15 month bear trend line and the 1.12 Big Round Number.
What about the bears?
The EURUSD has been forming a series of new lows for 2 years. Traders have been selling every 2 – 3 week rally, betting that each would be a bull leg in the bear channel.
This has been a very good strategy. The bears will continue to sell 200 – 300 pip rallies until they believe that the bear trend has ended.
One sign of that would be if the bulls get consecutive closes above a major lower high. Is the October high major enough? For some computers, yes.
A more important lower high is the June 25 high of 1.1413. If the bulls get 2 closes above that high, traders will conclude that the bear trend has ended. They would then look at the chart as being in either a trading range or a bull trend.
The bulls will keep buying new lows in bear channel
What happens if the bears get a reversal down from the October high? Not much. The bulls have been fearlessly buying every new low for 2 years. They know that trends weaken as the age. That will make the bulls more willing to below below the October low or on a reversal up from the October low.
Monthly S&P500 Emini futures chart:
Doji bar in strong rally
The monthly S&P500 Emini futures chart is forming a doji bar in December. The bears want the month to close on its low. It would then be a credible sell signal bar for a wedge rally in 2019 and for a reversal down from the top of the 13 year bull channel. At the moment, this is unlikely.
The year has been in a tight bull channel, despite the wedge rally. When a tight bull channel reverses, the reversal is usually minor. Consequently, the best the bears can probably get over the next couple months is a pullback and not a bear trend.
Yes, 2019 was in a tight bull channel. That is good for the bulls. But look at the bars. Many of the bull bars had prominent tails below and several others were dojis or bear bars.
When a rally looks like that, it typically will end up being a bull leg in a trading range. That means that there would be a bear leg within maybe 5 bars. But 5 bars is 5 months, and the Emini could go considerably higher in the meantime. The bottom of the developing range is the 2019 low at around 2400. If there is a bear leg, that becomes a reasonable target later next year.
Rally will probably soon evolve into a trading range
As I said, a tight bull channel usually does not reverse into a bear trend. More often, it first has to stop going up and begin to go sideways. At that point, the bears will try to create a double top or a micro double top. If they get that, they then will have a better chance of a bear trend.
Since this is a monthly chart, several sideways bars means several months. As a result, the downside risk over the next few months is not great.
But, remember, this rally looks like a leg in what will become a trading range. Therefore the upside potential from here is also not big. Traders should expect mostly sideways bars for a few months. That means maybe a bar or two down or a bar or two up, but not a strong trend either way.
Weekly S&P500 Emini futures chart:
Doji bar after 1st pullback in 9 bar bull micro channel
The weekly S&P500 Emini futures chart had been in a micro channel until this week. Once this week traded below last week’s low, this week became the 1st pullback in 9 weeks. It therefore ended the micro channel.
A micro channel means that the bulls were so eager to buy that they were buying above the prior week’s low. They were not waiting for a pullback. Once they finally get a pullback, they typically buy it. That is what happened this week. Despite the strong selloff on Monday and Tuesday, the bulls bought. The rally completely retraced the selloff at the start of the week. Traders should expect either a trading range or slightly higher prices over the next few weeks.
Last week’s bad sell signal bar meant buyers below
For the bears, last week was a sell signal bar for a reversal down from the top of a yearlong bear channel. That channel is different from the monthly bull channel, which is 13 years long. It is also different from the 2 month bull channel on the daily chart.
Yes, last week was a sell signal bar on the weekly chart, but it had a bull body. That is a weak sell signal bar. In addition, the context is bad for the bears. Traders know that the bulls would buy the 1st pullback. As a result, I said last week that this was a weak sell setup and that there would probably be more buyers than sellers below last week’s low.
Many of the bulls who bought last week’s low knew that the selloff might fall 100 points. They scaled in lower. Since last week was a bad sell signal bar, a bull buying below last week’s low, scaling in lower, and using a wide stop had an 80% chance of not losing money, and a very good chance of making money.
When the rally went back above last week’s low on Wednesday, those bulls could exit their 1st buy at breakeven. They could exit their lower buy with a profit.
High 1 bull flag, but doji bar
The bulls bought aggressively this week and retraced Monday and Tuesday’s selloff. The week closed around the open and it was a doji bar on the weekly chart. It was a brief pause in a bull trend. However, this week is still a buy signal bar for next week. It is a High 1 bull flag.
But a doji is not a strong buy signal bar. Many bulls will prefer to buy another pullback instead of buying at the high. There might be a relative lack of bulls buying above this week’s high. Consequently, a rally above this week’s high might not get too far. That doji bar increases the chance of some sideways trading over the next week or two.
Daily S&P500 Emini futures chart:
Strong reversal back up after break below 2 month bull channel
The daily S&P500 Emini futures chart broke strongly below the 2 month tight bull channel this week. However, it also reversed up strongly. This is a small version of what took place last Christmas. There was a huge selloff, but it was a bear trap. The bulls bought it aggressively and got a strong bull trend for all of 2019. But this bear trap is less certain because it is at the top of a buy climax and not at the bottom of a sell climax.
Problems for the bulls
The bulls once again are hoping that this week’s selloff was another bear trap. They want the 2 month bull trend to quickly resume and for the year to close at a new high.
But there are problems with their reversal up. The buy signal bar on Tuesday was not especially big. Wednesday was the entry bar and it was only a small bull bar. Also, it had a prominent tail on top. Thursday was the follow-through bar and it had a bear body. Friday was good, but it did not break strongly above last week’s all-time high. Traders will wonder about a double top, especially if the Emini stalls here for a few days. If there is a reversal down within a few days after a new high, there would be an expanding triangle top.
Problems for the bears
The bears got a big bear bar on Monday and a gap down on Tuesday. The selloff broke far below the 2 month bull channel. A strong reversal down from a climactic rally typically has at least a small 2nd leg sideways to down.
However, the Emini completely retraced the selloff. Very often, a break below a trend line forms a higher low. Traders then redraw the line. The result is a broader, less steep bull channel. But it is still a bull trend, and not the reversal down that the bears wanted.
Next, the 2 month rally was in a tight bull channel. A tight bull channel does not typically immediately break into a bear trend. There is usually a transition in which the market goes sideways for at least 5 – 10 bars. The bears are hoping that this week’s reversal up will be part of that transition. They need a double top with last week’s high.
Who will win?
With problems for both the bulls and the bears, which side will take control? In general, a strong reversal down from a buy climax has at least a small 2nd leg sideways to down.
However, when there is a surprisingly big selloff like we saw on Monday and Tuesday, there is often a strong rally back up. Many bulls see the selloff as overdone and they buy what the believe is a brief discount. Many bears are surprised to quickly get a big profit and they buy back some or all of their shorts. This buying by both the bulls and the bears often reverses most or all of the initial selloff. That is what we saw this week.
The momentum up this week favors the bulls. So does the strong bull trend on the daily, weekly, and monthly charts. If the bears can get the Emini to go sideways for a few days, they will have a 40% chance of a reversal down to last week’s low. But, they only have a 30% chance of a strong break below that low and then a measured move down. For them, there will be a double top. However, a trading range is still more likely than a trend reversal down.
If there is a 2nd leg down, can it grow into a bear trend? Unlikely. With the bull trend as strong as it has been on the weekly and monthly charts, the odds favor sideways to up over the next month or two.
The Emini will probably have to go sideways for at least a couple months before the bears could have a good chance of creating a bear trend. Consequently, the odds continue to favor sideways to up.
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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.
For ES monthly chart, you stated that – ‘The bottom of the developing range is the 2019 low at around 2400. If there is a bear leg, that becomes a reasonable target later next year.”
Does this mean that you’re viewing rally from Nov 2016 till Jan 2018 as “Spike” on ES Monthly and then ES “may be” forming a new channel possibly drawn from Sept 2018 top and upwards? – just curious. That would be extremely bullish scenario.
The 2016 and 2017 rally was a breakout of a an attempt at a top in 2014 and 2015. The past 2 years was another attempt. While it is possible that the monthly chart might channel up from here, it is more likely that 2018 – 2019 will be the Final Bull Flag.
By some measures, the rally from 2010 is the longest bull trend in history. How much more overbought is likely? The probability is that it will exhaust itself within a couple of years. I have talked about this many times. This is a monthly chart and it can years to top out.
At a minimum, it will convert into a trading range down to around 2400 for many years. It might also reverse down 50% or more, like it did in 2002 and again in 2009, and like it did many times in the 1970s. The important point is that 2017 – 2018 is probably a Final Bull Flag. It is much less likely that it will be a pullback from the 2009 – 2017 breakout and the start of a protracted bull channel.