Market Overview: Weekend Market Analysis
The SP500 Emini futures traded lower after making a new high this week. An outside bear bar on the weekly chart. It is a 50% pullback from the December 20 rally. Bears want a test of the December low from a higher high double top with November 22, or a wedge top with September 2 and November 22 followed by a breakout lower to October’s low. However, more likely, the current pullback will be minor and be followed by a retest of the trend’s extreme.
The EURUSD Forex traded below last week’s low but reversed back higher to close in the upper half of the week’s range. The bulls are making higher lows and want this week to be a pullback followed by a second leg sideways to up and a strong breakout above the 7-week tight trading range. If there is a bear breakout below the tight trading range, odds are it will be the final flag of the bear trend.
EURUSD Forex market
The EURUSD weekly chart
- This week’s candlestick on the weekly EURUSD Forex chart was a doji bar with a small bear body closing in the upper half of the week’s range with a long tail below. This week’s candlestick is the 7th consecutive sideways week.
- Last week, we said that the consecutive bull bar closing near its high was a weak sell signal bar for the bears which reduces the chance that the EURUSD going far below it without another pullback.
- This week traded below last week’s low but reversed back to close above the middle of the bar. While it had a small bear body, the long tail below indicates that the bears are not as strong as they would like to be. There were more buyers than sellers below last week’s low.
- Should next week trade above this week’s high, the double top bear flag entry would have failed.
- The bulls see last week as a pullback following the consecutive bull bars and expect at least a small second leg sideways to up from here.
- The bulls want follow-through buying over the next 1 to 2 weeks and a strong breakout above the tight trading range. They need to get big bull bars closing on their highs and closing far above the top of the seven-week tight trading range before traders will conclude that a bull trend has begun.
- If those legs are strong and there is a strong breakout from the tight trading range, there could be a rally back to the October 28 high, which was the start of the most recent sell climax and therefore a magnet.
- Bulls want these seven sideways bars to be a base after the two big bear bars in early November. They want those two bars to be an exhaustive end of the yearlong selloff.
- Since this week is a doji bar closing in the upper half of its range with a long tail below, it is a weak sell signal bar for next week.
- Is it a good buy signal bar? Closing above the middle of the bar qualifies it as a bull signal bar. However, buying at the top of a trading range just below a bear trend line is also risky.
- A tight trading range is an area of balance and a breakout mode situation. There is a 50-50% probability of a bull and bear breakout. It also means that there is a 50% chance that the first breakout up or down will fail and reverse.
- If there is a break below the 7-week trading range, odds are it might be the final flag of the bear leg.
- Al has been saying for a few weeks that there should be a sideways to up move lasting at least a couple of months starting from where the EURUSD is now or from slightly lower. The EURUSD is in the middle of a 7-year trading range. Legs rarely go straight from the top to the bottom without some confusion, which is a hallmark of a trading range. This last year has been clearly bearish. Clarity does not last forever in trading ranges.
- Al has also said that currencies have an increased chance of reversing in early January. The current bear trend began on January 6th of 2021. The bears hope that the yearlong bear trend is a resumption of the bear trend that began in 2008. More likely, the seven-year trading range will continue.
- A 2021 selloff is still more likely a pullback from the 2020 rally than a resumption of the bear trend that began 14 years ago.
- There is only a 30% chance that this selloff will continue down with only brief pullbacks and then break strongly below the 7-year trading range.
The EURUSD daily chart
- The EURUSD reversed lower sharply from a low 4 short setup on Monday but did not get a strong follow-through selling the following day.
- The bulls manage to create a reversal higher on Friday from a higher low to close slightly below the trading range high.
- The bears are hoping that the seven-week trading range will form a bear flag and continue the yearlong bear trend. There were several reversals lower from a double top bear flag, a wedge bear flag and a low 4 short setup this week which had no follow-through selling. They want the pullback (bounce) on Friday to be a deep pullback followed by a second leg sideways to down and then a test and a strong breakout of the trading range low.
- The bulls are forming higher lows (November 24, December 15, and Jan 4) and have more prominent bull bodies within the tight trading range in recent weeks.
- They want a strong breakout above the November 18 high and measured move up which will take them to the November 10 high which was the start of the sell climax on the daily chart. If those legs up are strong, there could be a rally back to the October 28 high.
- However, a trading range is an area of balance and a breakout mode situation. There is a 50-50% probability of a bull and bear breakout. It also means that there is a 50% chance that the first breakout up or down will fail and reverse.
- Al has said that picking which move up or down will lead to a successful breakout of the trading range is a low probability bet. Reversals are always more likely in trading ranges, and this remains true.
- If the reversal is more sideways, there could be a new low. However, a tight trading range after an extended bear trend tends to be the final bear flag.
- With the chart in a 7-year trading range, traders still expect a couple of months of sideways to up trading to begin soon.
- There’s only a 30% chance that the small pullback bear trend will continue down to last year’s low without at least a rally lasting a couple of months or more.
S&P500 Emini futures
The Monthly Emini chart
- The January monthly Emini candlestick currently is a bear bar trading near its low after making a new high. It is the 3rd reversal since September.
- December was a bull bar closing near its high therefore it is a weak sell signal bar for a strong reversal down.
- The bears want a reversal lower from a micro wedge even if January trades slightly higher first. They want January to be a failed breakout above December outside up bar, like November. A third reversal has a higher probability of working.
- December is the third leg up where the first legs up were August and October so therefore a micro wedge. Since the bull trend is extreme, traders are looking for reasons to take some profits. A micro wedge is often a trigger for profit-taking. That would probably lead to a couple of bars sideways to down.
- The bar after an outside bar often is an inside bar or has a lot of overlapping price action with the outside bar. If January is a bear bar closing near the low, it would be a sell signal bar for February.
- Al has said that the bull trend on the monthly chart has been very strong. Therefore, even if there is a sharp selloff down to the October low in the 1st half of this year, it should be minor. The best the bears will probably get on the monthly chart is a trading range for many months. A trading range in a bull trend is usually a bull flag. Therefore, traders should expect a bull breakout of the trading range later in the year.
- The bulls want a continuation higher to a measured move target (using the Aug-Oct trading range height) which will take them to 4930 near the top of the trend channel line. The 5000 big round number is a magnet above.
- Can this rally continue up throughout 2022 without a pullback? That is less likely. It is overextended and there is a likely micro wedge forming.
- Therefore, the bull trend will probably transition into a trading range for at least a couple of months.
- For example, if the market were to get down to the October low, then the trading range would have begun in August and there would be a six- or seven-month trading range on the monthly chart.
- At that point, the bulls will try to get a resumption up from a double bottom bull flag and the bears will try to get a bigger reversal down.
- Al has said that the bull trend from the pandemic crash has been in a very tight bull channel. The first reversal down will probably be minor even if it lasts a few months and not continue straight down into a bear trend. Even if it sells off for 10 to 20% correction, that would still only be a pullback on the monthly chart even though it could be a bear trend on the daily chart.
- Al also said that the gap up in April 2021 could lead to a measured move up to 5,801.5 before the bull trend finally ends.
The Weekly S&P500 Emini futures chart
- This week’s Emini weekly candlestick was an outside bear bar closing near the low. It made a new high earlier in the week but reversed lower from a micro double top and a wedge top.
- Last week’s breakout bar above the 8-week trading range had a prominent tail and small body which means the bulls are not as strong as they could have been. The 8-week trading range late in a trend often is a final bull flag. Therefore, a rally from here may fail within 3 to 5 weeks, possibly at the top of the bull channel and possibly around the 5000 big round Number.
- A tight trading range is a breakout mode pattern and has a 50-50% chance of a successful bull or bear breakout. It also has a 50% chance that the first breakout up or down will fail and reverse within a couple of bars. Because it’s in a strong bull trend, a bull breakout is slightly more likely than a bear breakout.
- Therefore, if the market does go up over the next several weeks, it probably will not go up very far before there is a reversal down to the bottom of the bull flag, which is the December low.
- Can next week reverse higher following this week’s big bear bar? Of course. It has done so many times in the past 2 years and is common in a strong bull trend.
- The bulls want this week to simply be a breakout test followed by a second leg sideways to up. They see this week’s big bear bar simply as a 50% pullback from the December 20 rally.
- Since this week’s candlestick is a bear bar closing near the low, it is a sell signal bar for next week. The bears want a higher high double top with November 22 or a wedge top with September 2, November 22. They want a test of the December low followed by a measured move down which will take them to the Oct low.
- However, the bears have not been able to create follow-through selling and consecutive bear bars closing near their lows. They will need the next 1- to 2-weeks to be bear bars closing near their lows to convince traders that a deeper pullback may be developing.
- Al has said that the Emini has been in a strong bull trend since the pandemic crash. There have been a few times when the bears got the probability of a correction up to 50%, but never more. The probability of higher prices has been between 50 and 60% during this entire bull trend. It has never been below 50%. That continues to be true.
- The strong selloffs, like in September in 2020 and again in 2021, pushed the probability for the bears up to 50%. But every prior reversal has failed, and the bears never had better than a 50% chance of a trend reversal.
- Next week might trade slightly lower to test if there are more sellers or buyers below this week’s low. However, traders should also be prepared for a strong reversal up at any time.
The Daily S&P500 Emini futures chart
- Tuesday made a new all-time high but closed as a bear bar with a tail below. The Emini then reversed lower from a micro double top and a wedge top with November 22 and September 2.
- The bulls see the move lower as a 50% pullback from the December 20 strong rally. However, the sell-off is in a tight 4-bar bear microchannel. Bulls may not buy aggressively until there is at least a micro double bottom. This means that there may be at least a small second leg sideways to down next week.
- The bears want a reversal lower from a higher high double top with November 22 or a larger wedge top with November 22 and September 2. They want a pullback to the December 3rd possible final flag low and then a breakout and measured move which would take them down to the October 3rd low which was the start of the wedge rally, and which is a common magnet after a wedge reversal.
- If the bears continue to get a few more consecutive bear bars closing near their lows, the odds of a deeper pullback below December’s low increases.
- However, every pullback has been bought by the bulls since the pandemic crash. The 50-day and 100-day moving average and bull trend line remain strong supports. Until there is a strong break with follow-through selling below these support levels, bulls will continue to bet on higher prices and every pullback to be minor.
- Al said that that the entire rally from July looks like a bull leg in what will become a trading range. Trading ranges often begin before bull or bear trends end.
- For the Emini to evolve into a trading range, it needs a bear leg. The bear leg will probably begin in the next couple of months. The Emini should fall to the December low and possibly the October low by summer.
- However, it will probably form a double bottom with one of those lows instead of continuing down into a bear trend.
- Therefore, there probably will be at least a couple of months of profit-taking starting in the next few months.
- For now, odds slightly favor sideways to down for next week, but traders should be prepared for a strong reversal up at any moment.
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Weekly Reports Archive
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My experience is that some of the smartest money trades volatility. The term structure in VIX futures is and has been bullish since the 2020 bottom with prices in contango. It will be interesting to see when that changes.
Andrew does a very good job. If he wrote this report (and others recently), it shows a tremendous and admirable grasp of Al’s teaching.
Dear Nickola, a good day to you..
Thank you very much for your compliments.. but there is still much for me to learn from our master..
I am only able to improve my writing and analysis thanks to Al’s continuous guidance.. 🙂
Wishing a great year to you Nickola!
Thank you Al for the report. In the last paragraph of Emini monthly report, you mentioned 5,801 is the MM resistance level, I assume it is meant to be 4,801. Is it correct or am I missing sth?
5,801 is correct, based on the gap around 4,000 on the monthly chart. I will be recording a video within the next few days about what I think is likely over the next year. It contains a slide showing the measured move.