The Emini rallied strongly for 3 weeks. The daily chart now has a parabolic wedge, and the Emini is in the sell zone on the weekly chart. Traders should expect a pullback over the next week or two, and a trading range for at least another month.
The 30 year Bond futures sold off after a wedge buy climax. Because a 2nd leg sideways to down is likely, any rally over the next 2 weeks will probably form a lower high.
The EURUSD daily Forex chart broke above a 2 month trading range. But it immediately reversed back into the range. If the bulls do not get follow-through buying early in the coming week, the breakout will probably fail. Traders will then assume that the trading range is continuing.
US 30 year Bond futures chart:
End of 1st leg down from wedge top
The US 30 year Treasury Bond futures chart pulled back to the 20 day EMA on Thursday. There has been a gap between the low of every bar and the moving average for more than 20 bars. This is the 1st pullback in over 20 days and it is therefore a 20 Gap Bar buy signal.
The bulls have been willing to buy above the average price for 2 months. They now finally have an opportunity to buy at the average price.
However, will they buy and hold for a move above the December high? Not likely. December ended with a parabolic wedge buy climax. The selloff retraced most of the final buy climax, which is typical.
But, this is now a Big Down move after a Big Up move. This creates Big Confusion, which is a hallmark of a trading range. Consequently, any rally over the next 2 weeks will probably form a lower high.
After a buy climax, a market usually has at least 2 legs sideways to down. At that point, the bulls will decide whether to buy again or wait to buy lower.
The bottom line is that the daily chart will probably bounce next week, form a lower high, and then test this week’s low a week or so after the bounce.
EURUSD Forex weekly chart:
Breakout above 2 month range might fail
The EURUSD daily Forex chart broke above the 2 month trading range on Wednesday. However, it reversed down over the next 2 days. Will the breakout succeed and continue up to 1.17 or 1.18? Or, will it reverse back down and break below the range?
The bulls hope that the 2 day selloff is simply a pullback from the breakout. They see the 5 day rally from the November 12 low as the start of a bull trend. There has been a series of slightly higher highs and lows with deep pullbacks. They hope that this 2 day selloff is just another deep pullback in a broad bull channel.
However, they need a reversal back up on Monday or Tuesday. If they do not get it, the breakout will probably fail.
2 month Low 2 bear flag
Thursday was a reasonable sell setup on the daily chart. The bears see the 5 day rally from the November 12 low as the 1st leg up from a wedge bottom. Next, there was a 2 month sideways pullback. Finally, the daily chart had one more leg up, beginning with the January 3rd low. Rallies from wedge bottoms typically have at least 2 legs up. The bear trend then often resumes.
Friday was a good entry bar for the bears. If they get a third bear bar on Monday, the bull breakout will likely have failed. Traders will conclude that the trading range is continuing or that the 2018 bear trend is resuming.
They will watch the selling. If the chart quickly falls below the December low, they will conclude that the bears will get about a 200 pip measured move down to below 1.10.
Monthly S&P500 Emini futures chart:
Bull inside bar testing the November low
The monthly S&P500 Emini futures chart has been reversing up in January. December dipped slightly below the 8 year bull trend line. In addition, it reached the 20% psychological level. That is where the news declares that the stock market has entered a bear trend. However, it has reversed up sharply from that support.
So far, the month is a bull inside bar. It rallied above the February 2018 low and is therefore back in the 2018 trading range. Furthermore, it broke above the October low. The next magnet above is the November low.
Traders bet against trading range breakouts
Last year, the stock market was in a trading range. Most breakout attempts fail. Consequently, the bulls buy at support and buy more lower. They are betting that the magnet that kept the market sideways for a year will be strong enough to pull any breakout at least slightly back into the range.
There are institutions who bought the February low and scaled in lower. They needed the rally to get back to the February low, and it did. That allowed them to get out breakeven on their first buy and with a profit on their lower buys. If bulls can make money buying strong bear breakouts, then maybe the bear breakout is not as strong as traders fear.
November was a bad sell signal bar
November’s low is also a magnet for scale-in bulls. November was an inside bar above the 20 month EMA. It had a bull body and a big tail below. Also, it was the 1st pullback to the EMA in over 20 bars. That made it a 20 Gap Bar Buy setup. It was therefore a weak sell signal bar. Consequently, it was reasonable for a bull to buy the November low with a limit order.
When a trader takes a reasonable trade, scales in, and uses a wide stop, he has an 80% chance of making money. That is the case here. Therefore, there is a strong magnet at the November low. Both the bulls and bears know that it is a magnet. The bulls keep buying until the rally reaches the target. They then take profits, which often results in a pullback.
Why are support and resistance magnets?
As the rally approaches the magnet (resistance), there is little incentive for the bears to sell. They believe the rally will get very close to the target. Why sell if you know you soon can sell higher? This psychology often results in the market getting vacuumed up to resistance.
The opposite happens with support below. For example, the stock market crashed down to the 8 year bull trend line only to reverse up sharply over the past 3 weeks. That trend line was support and therefore a magnet. Once there, the sell vacuum ended and the Emini rallied sharply.
What happens when the stock market reaches a magnet?
The more important a support or resistance level is, the more potential there is for a big move up or down. In this case, the rally is testing resistance. All of the bulls who bought in 2018 are holding losing positions. If enough use this rally to exit with a smaller loss, they could turn the market down.
Many bears took profits at the support of the 8 year bull trend line. They want to sell again. Major resistance is a good location.
What traders will find out over the next several weeks is whether there are enough bulls and bears wanting to sell around 2650 – 2700 to overwhelm the buyers. If there are, the Emini will test the December low.
But, if the rally just keeps moving up in a tight bull channel, there will encourage more buyers and sellers. The result could be a new all-time high within a few months, although this is unlikely.
Which is more certain? As strong as the rally was, it is still significantly weaker than the October and December selloffs. Unless the bulls can create strong bull trend bars in January and February, the odds are that the sellers will overwhelm the buyers. Consequently, the Emini is currently more likely to test the December low than the all-time high.
Weekly S&P500 Emini futures chart:
Strong 3 week rally from bull trend line
The weekly S&P500 Emini futures chart has reversed up for the past 3 weeks. Each week was a bull trend bar closing near its high. This is a sign of aggressive, sustained buying. The bulls will continue to buy until the bears can begin to create bear bars. As a result, the rally will likely go at least a little higher.
Most bears will wait for the buying to stall before looking to sell. They typically will want at least a micro double top before they will bet on a swing down. At a minimum, that would require at least 2 more weeks. For example, if the Emini goes sideways for the next 3 weeks, it could form a micro double top.
The rally is testing the breakout points of the February, April, and November lows. The next resistance is the 20 week EMA, which is above 2650.
Can the rally make it all of the way to the December sell climax high? The most recent sell climax high is always a magnet after a climactic reversal. However, at the moment, that is probably too far above for a 1st reversal up.
Daily S&P500 Emini futures chart:
Emini parabolic wedge buy climax has entered sell zone
The daily S&P500 Emini futures chart sold off with 10 consecutive bear days in late December. That has never happened in the 100 year history of the stock market. It was therefore unsustainable and climactic. An extreme sell climax typically leads to a strong rally. That rally can go further up and last longer than what might seem reasonable.
I wrote on December 24 that there would probably be a rally that was strong enough to make traders wonder if the bull trend had resumed. That has been the case. Big Down, Big Up, creates Big Confusion. Confusion is a hallmark of a trading range. Traders should therefore expect a lot of trading range trading over the next couple of months.
Support becomes resistance
No rally lasts forever. This rally is now testing the bottoms of the bull legs in the 2018 trading range. Each is a breakout point for the December stock market crash. Since they formed the bottom of the yearlong trading range, they were support. Now that the Emini broke far below them, they are resistance.
When a market breaks far below support, the 1st rally typically fails to hold above those levels. That support now has become resistance. This resistance zone goes up to about 2700. Unless the bulls break strongly above 2700, the best they can expect from this rally is a trading range over the next couple of months.
Parabolic wedge buy climax
The 3 week rally has been in a tight bull channel. Thursday was both a pullback from the 2nd leg up and the start of a 3rd leg up. A strong bull trend in a tight bull channel with 3 legs up is a parabolic wedge buy climax.
Most buy climaxes result in exhausted bulls. They take profits and wait for about 10 bars before deciding whether to buy again. This process will probably begin within a couple of weeks. Traders are deciding if the top will be near the November low or the December 12 sell climax high. Therefore the sell zone is between 2600 and 2700.
Targets for the bears
If the bears get a reversal down, the 1st target is the most recent higher low. That is the January 3 low. If the Emini gets there, the bulls will try to create a reversal up. That would be a double bottom higher low major trend reversal buy setup.
Below that, it is the December low. The bulls will buy at there and try to create a double bottom. The bears want a breakout below that level and then a selloff to the 2100 level at the top of the 2014 – 2015 trading range. A reversal up there would be a breakout test.
If that does not hold, the Emini would then probably fall to 1800. That is the bottom of the 2014 – 2015 trading range, which is a good candidate for a Final Bull Flag.
I have been writing for over a year that the Emini will probably get there, even if it 1st goes far above. This is still the case. I have been saying that the selloff would probably be within 3 years. In addition, there might be one more new high first.
always enjoy reading your insight of the market. have learned a great deal from your descriptions of what the players might do next.