Market Overview: Weekend Market Update
The Emini rallied strongly this week and formed an outside up bar on the weekly chart. This week is therefore a buy signal bar for next week.
The crude oil futures market tested the January 14 low and $50 this week. Because of the parabolic wedge sell climax, there will probably be at least a couple weeks of profit taking soon.
The EURUSD daily Forex chart had a consecutive outside bar buy signal this week. It will probably lead to a test of the March 20 high of 1.1448.
Crude oil Futures market:
Parabolic wedge sell climax at $50 support
The crude oil futures is in a sell climax at support. In mid-April, I said that the bull trend would soon reverse and test support below $58 and possibly all of the way down to the January 14 low. This week poked below that low and bounced a little.
I chose that low as a target because it was the 1st pullback in the strong reversal up from the extreme sell climax of late 2018. That initial rally was the spike in a Spike and Channel bull trend. The channel began with that low.
Since 75% of bull channels have bear breakouts, traders should consider every bull channel to be a bear flag. Once there is a breakout below the bull trend line, the selloff often tests down to where the channel began. That is why I kept mentioning the January 14 low.
Bull channel typically evolves into a trading range
Yes, this selloff has been strong. However, during the bull channel, I said that the channel would have a bear breakout and a deep reversal down. I said that the rally would end up as a bull leg in a trading range that could last a year.
Now I am saying the opposite. The selloff since April 23 is probably just a bear leg in the developing yearlong trading range. It is a 2nd Leg Bear Trap. The 1st leg was the 3 bar selloff from the April 23 high. The 2nd leg down probably ended this week. It is a bear trap because the bears expect it to lead to a bear trend. More likely it is either the end or near the end of the selling.
Trading ranges have legs up and down. This leg down will end soon and it might have ended this week.
There are a few reasons for this. First, I already mentioned that it tested the start of the bull channel, and that often leads to a trading range.
Next look at the price action in the selloff on the daily chart (not shown). There was a collapse on May 23 and then a 2nd 2 day sell climax on May 31. A strong breakout typically has at least a small 2nd leg down. The one day selloff on Wednesday might be the 2nd leg down from that May 31 selloff.
It is also the 3rd leg down in the 3 week strong bear breakout. Three legs down in a tight bear channel is a parabolic wedge sell climax. It usually attracts profit takers, especially when the selloff is also a test of major support.
Profit-taking likely soon
If a bear takes profits in a big bear trend, he will not look to sell again a bar or two later. That does not make sense. If that was his thought, he would simply hold short. Therefore, if Thursday was the start of profit-taking, the bulls who take profits will wait to sell again near resistance, like around the 20 day EMA.
A profit taking rally often continues up to the top of the most recent sell climax. That is the May 30 high, which is just below the $60 Big Round Number.
The bears also want to give the bulls a couple chances to reverse the bear trend before selling again. Therefore a profit-taking rally typically has at least 2 legs and lasts about 10 bars or more.
Since profit-taking is likely soon, the odds favor at least a couple weeks of sideways to up trading. Furthermore, the downside from here is probably small after consecutive sell climaxes down to support.
EURUSD weekly Forex chart:
1st break above the 20 week EMA in 9 months
The EURUSD weekly Forex chart rallied this week after a micro double bottom. However, the bulls need 2 closes above the 20 week EMA before traders will conclude that there is a reversal underway. There have been many reversal attempts over the past year and each of the failed. The yearlong bear channel soon saw a new low.
Look at what has happened at the 20 week EMA over the past year. Every break above the average failed. In fact, September 20 is the only close above the 20 week EMA in over a year. The following week was a bear outside down week that closed below the EMA and near its low. The bulls need a bull bar next week to change the pattern and make traders believe the bull breakout will succeed.
Bear channel is a bull flag
Every week I write that the weekly chart is in a bear channel. That will not last forever. Channels end in either of two ways. There is a 25% chance of a strong break below the bear channel, and then an even stronger bear trend.
But there is a 75% chance of a successful break above the channel. There is often a brief strong break below that reverses up before the bull breakout.
Once there is a bull breakout, the bulls will try to continue the rally up to where the bear channel began. That is the June 2018 high above 1.18. It took a year to get down to 1.11. Traders should expect any rally up to 1.18 to take many months and possibly a year.
There is now credible evidence that the channel is ending. However, the bulls need follow-through buying over the next few weeks. In particular, if they have a 2nd strong bull trend bar on the weekly chart next week, the odds will be that the bear trend has ended.
It is important to remember that there have been many bull breakouts over the past year. Read my post during any of the breakout attempts. You will see that during every strong bull or bear breakout, I wrote that a reversal was more likely than a successful breakout. However, if the bulls get 2 closes above the March 20 high, the odds will shift in favor of a successful bull breakout.
Daily EURUSD Forex chart has consecutive outside bars
Wednesday was an outside down bar on the daily chart. However, Thursday was an outside up bar. Consecutive outside bars where the 2nd bar is a bull bar is a reliable buy setup. Friday’s breakout above Thursday’s high will probably lead to a test of the March 20 major lower high. The bulls will be more inclined to buy pullbacks and breakouts over the next few days, expecting higher prices for another week or more.
Monthly S&P500 Emini futures chart:
Failed breakout below outside down bar
The monthly S&P500 Emini futures chart has a big bull bar so far in June. I have been saying for the past month that the selloff would probably only last 2 – 3 months. Traders are debating whether it has ended.
May was an outside down bar and it formed a perfect double top with the September high. When June traded below the May low, it triggered the monthly sell signal. At the end of May, I said that there could be more buyers than sellers below the May low because the 4 month rally was so strong. So far, that has been the case.
Strong bull candlestick now, but 3 weeks left in June
It is early in the month and the month could look very different when it ends. If there is a selloff, June could be a bear trend bar at the end of the month. Alternatively, it could rally above the May high and be an outside up month. Since May was an outside down month, this would create consecutive outside months. Traders in July would see June as a buy signal bar.
These are the 2 extremes and therefore neither is likely at the moment. More likely, June will have a bull body, but not break above the May high. Even a small bull body would reduce the chance of a big selloff in July.
Throughout the 4 month rally, I said repeatedly that the bulls would buy the 1st pullback and that the rally would have at least a small 2nd leg sideways to up. That is still the case, even if the pullback lasts another month or two.
Weekly S&P500 Emini futures chart:
Emini outside up bar and double bottom weekly buy signal
The weekly S&P500 Emini futures chart traded below last week’s low and then above its high. This week is therefore an outside up bar. It is also a double bottom with the March 8 low. This week is therefore a buy signal bar for next week.
It is important to pay attention to the context. The context is the appearance of the bars to the left. The 1st 4 bars down from the high had prominent tails. I wrote every week that a selloff that looks like that is usually going to be a bull flag or a bear leg in a trading range and not a bear trend. Those tails represent reversals. The selloff lacked sustained selling.
Has the trading range price action ended?
This past week reversed the week before. The prior 4 weeks all had reversals that lasted one week. This reversal up is now a 2 week reversal. It is therefore similar to the 4 week selloff except that the reversal was spread of 2 weeks.
Traders have to consider the possibility that these 2 weeks might be just a continuation of the price action of the 4 prior weeks. They will find out over the coming week. If next week is a big bull trend bar closing on its high, the Emini would have broken the pattern of quick reversals. That would increase the odds of the rally continuing up to the all-time high.
If it is anything less, traders will wonder if the correction will continue for several more weeks. If so, the Emini could be sideways to down before the bulls again try to test the all-time high.
Daily S&P500 Emini futures chart:
Strong reversal up from test of February 14 gap
The daily S&P500 Emini futures chart reversed up strongly this week from a test of the March 8 low and the February 14 gap. The bulls hope that this double bottom will lead to a resumption of the 2019 bull trend.
That gap was an important magnet below. The selloff not only did not close the gap, it reversed up extremely strongly from just above the gap. That reduces the chance of the gap getting filled within the next several weeks.
Traders see this strong reversal as similar to the one that began on December 26. It certainly is strong enough to have at least a small 2nd leg up. Consequently, the bulls will be eager to buy the 1st 1 – 3 day reversal down.
5 month trading range within 18 month trading range
It is important to realize that the Emini has been in a big trading range for 18 months and a smaller one since early February. Traders do not yet know if this reversal up is just a bull leg in the smaller trading range or a resumption of the early 2019 bull trend.
If the bull trend is resuming, the rally will have to close above the May 16 major lower high of 2894. Next, the bulls will want 2 closes above the September/May double top. Without this, traders have to assume that the 5 month trading range is intact.
In a trading range, traders buy low, sell high, and take quick profits. They expect reversals. Trading ranges resist breaking out. Most breakout attempts fail. For example, the break below the May 13 low failed, just as the attempt to break above the September high failed. Therefore, at the moment, there is still a 50% chance that this strong rally is simply a strong bull leg in the 5 month trading range.
The bears want a bigger head and shoulders top
The bears had a head and shoulders top with the March 21, May 1, and May 16 highs. I said that there was only a 40% chance of a strong selloff to around a measured move down. The selloff ended after only 3 days below the May 13 neck line.
If this rally turns down from below the May high, the bears will see the rally as a new right shoulder in a bigger head and shoulders top. The left shoulder would be the March 4 high. The lower high would also be a lower high major trend reversal.
Even if the bears get a good sell signal bar on a reversal down, there still will only be a 40% chance of a bear trend. This is true of all trend reversal patterns. Most do not lead to trend reversals. Instead, they usually lead to more sideways trading or a resumption of the bull trend.
Test of the May 16 lower high
When a rally is strong like this, it typically is racing up to test important resistance. The obvious target is the May 16 high of 2894.00 and the 2900 Big Round Number slightly above.
If the Emini reverses down, there would be a double top bear flag. It is important to note that the 2nd leg up in a double top is often very strong. Consequently, this week’s strong rally still could simply be the 2nd leg up in a double top. If the bears get a strong sell signal bar next week, they will have a 40% chance of a swing down below this week’s low.
But, because of the 5 month trading range, the rally will probably stall before breaking above the resistance. Consequently, traders should expect a 1 – 2 day pullback sometime next week. Furthermore, the Emini might begin to go sideways into the June 19 FOMC announcement.
The bulls want the rally to go continue above the May 16 high without a pullback. If the rally is actually a resumption of the early 2019 bull trend, it might.
Possible bigger 2nd leg down from a lower high
The Emini has already had 2 legs down from the high. However, the selloff was in a tight bear channel. When that is the case, the two legs are often just a subdivision of a larger 1st leg down.
This is what traders will find out over the next 2 weeks. If this rally turns down from a lower high, the new selloff might be the 2nd leg down from the May high.
One reasonable target would be a Leg 1 = Leg 2 measured move. We don’t know where the top of the lower high would be. However, the 2nd leg down would be below this week’s low. It would close the gap above the February high, and probably fall to around 2650. If so, the odds still would favor a rally to a new all-time high from there.
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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.
