Market Overview: Weekend Market Update
The Emini has a parabolic wedge buy climax at the 2825 resistance level and a loss of momentum. A 2 month pullback is more likely than a continued rally to a new all-time high.
The crude oil futures chart is in a Spike and Channel bull trend. There is no reversal yet and there are magnets above between $60 and $62. However, once the rally tests that resistance, crude oil will probably pull back to below $55 over the following month.
The EURUSD Forex market has been in the longest trading range in 2 years. The increased volatility in March makes a breakout likely within the next month. It can be up or down.
Crude oil Futures market:
Bull channel is near profit-taking zone
The daily chart of the crude oil futures market is in a Spike and Channel Bull Trend. The rally to the January 11 high is the spike. Once there was a pullback down to the January 14 low, the channel began.
There have been 3 legs up in the channel. But, the daily chart has been sideways for 2 weeks. In addition, there is no clear top for the 3rd leg up.
Finally, there are magnets above. The 50% retracement is at 60.77. A Leg 1 = Leg 2 measured move projection is around $62. Leg 1 ended at the January 11 top of the Spike and Leg 2 began with the low of the January 14 pullback. That is the start of the bull channel.
In addition, $60 is a big round number and a psychological magnet. And, the January 28 and February 11 double bottom bull flag has a measured move target in that area as well.
The rally is close enough to the targets for traders to conclude that the resistance has been tested. That means a reversal down can begin at any time.
However, it is more likely that significant profit-taking will not begin until the rally goes above at least a couple of the targets. Traders should expect slightly higher prices within a couple of weeks and then a pullback to support. The nearest support is the March 8 higher low of 54.82.
Bull channel is a bear flag
A bull channel has only a 25% chance of a successful breakout above the top of the channel. If the daily chart accelerates up within the next few weeks, there is a 75% chance that the breakout above the channel will reverse down within 5 bars.
Because a bull channel typically has a bear breakout, traders should think of a bull channel as a bear flag. The first goal is a test of the bull trend line at the bottom of the channel. The selloff usually falls below that and tests lower highs in the channel.
The bull channel in a Spike and Channel bull trend typically evolves into a trading range. The bottom of the range is usually around the start of the channel. That is the January 14 low of 51.31. Since the rally from that low has lasted 2 months, a selloff back down will probably take at least a month. A minimum goal for the bears is a test of the March 8 higher low just below $55.
EURUSD daily Forex chart:
Increasing volatility increases the chance of a breakout soon
The EURUSD daily Forex chart has been in a trading range for 4 months. This is the longest trading range in 2 years. Traders know that a breakout is likely within a month. This is especially true after unusually strong legs up and down over the past month. Increased volatility often precedes a breakout.
Everyone is waiting for Brexit news before they are willing to bet on a trend. In the meantime, traders continue to look for reversals every 2 – weeks. In addition, they expect breakouts above and below major points to fail, as they have done many times over the past 4 months.
Every trading range has reasonable buy and sell setups. There are always double tops and bottoms and wedge tops and bottoms. So far, every one of them led to a 2 – 3 week leg in the range and then another reversal.
Traders will continue to bet on reversals until there are consecutive closes above or below the range. Once that happens, the odds will shift in favor of a successful breakout.
Monthly S&P500 Emini futures chart:
Shrinking bodies means loss of momentum
In March, the monthly S&P500 Emini futures chart had a high above the February high and a low above the February low. Another bullish factor was a bull body. But, the bull body was small enough to make the candlestick qualify as a doji bar. That is a sign of a balanced market.
This small bull body followed a medium size bull body in February and a big bull body in January. Shrinking bodies represent a reduction in momentum. As a bull trend loses momentum, it begins to pull back. At some point, a bar trades below the low of the prior bar.
With March being close to neutral, the bull trend could pause more. April might be sideways. If so, its high could be around the March high and its low could test the March low. This is important because the March low is about 100 points below the March close. Therefore, there is an increased chance of a 100 point selloff in April.
Strong 3 month rally, but still in a 16 month trading range
With so many stocks up 20% or more this year, it is easy to forget that the stock market is still in a 16 month trading range. Trading ranges typically have pullbacks every few bars. Therefore, the Emini will probably either trade below the March low in April or the April low in May.
That does not mean that the selloff will be the start of a reversal down from a head and shoulders top. However, it would remind traders that the market is still in a trading range.
Trading ranges regularly disappoint bulls and bears. There are many strong legs up and down. Trend traders are always hoping that one will lead to a trend. But, when a market is sideways, reversals are more common than breakouts. Consequently, the Emini will likely disappoint the bulls within a month or two.
2 month pullback coming soon
Look back over the past 100 years. How often has a year trended without more than a one month pullback? The answer is less than 20%. Traders should therefore assume that there will be at least one sideways to down pullback this year that lasts 2 or more months.
With the buy climaxes on the daily and weekly charts, the 2825 resistance, and the loss of momentum on the monthly chart, April or May are good candidates for the start of a pullback.
A pullback can grow into a bear trend. But, this rally has been unusually strong. In addition, it began as a reversal up from an extreme sell climax at the monthly bull trend line. This combination makes a 2nd leg up likely. Consequently, even if the selloff lasts more than 2 months and retraces more than half of the 3 month rally, bulls will look to buy a reversal up.
At the moment, traders should begin to expect a pullback lasting at least a couple months. It might simply be a sideways pause, but it could be deeper and faster than what is currently likely.
When will there be a new all-time high?
The 3 month momentum up is strong. But, since the chart is in a trading range, there is only a 40% chance that this rally will make a new all-time high without at least a 2 month pullback.
Furthermore, if it did, the buy climaxes on the daily and weekly charts would be even more extreme. That would increase the chance of a deeper and longer pullback.
Without a pullback within the next few months, there will probably be sellers at a new high. The bulls will have huge profits and a stop that is far below. They will therefore take profits. In addition, the bears will begin to sell, betting that the bulls will take profits.
A reversal down from a new high would create an expanding triangle top, which is a type of higher high major trend reversal. It would probably lead to a selloff lasting several months.
Weekly S&P500 Emini futures chart:
Consecutive sell signals, but no clear reversal down yet
The weekly S&P500 Emini futures chart triggered a sell signal this week by trading below last week’s low. Last week was the 2nd sell signal bar in the past 4 weeks. By closing near its low, it was a strong sell signal bar.
However, this week was the entry bar and it had a bull body. That reduces the chances of a sharp selloff. Instead, it increases the probability of the Emini going sideways for a couple weeks. Because the week closed near its high, it is a buy signal bar for next week. However, it is still on last week’s sell signal, and several other factors that I am discussing this week weaken the bull case.
10 bar bull micro channel means exhausted bulls
Because this week was a pullback and it had a bull body, it is a High 1 bull flag buy signal bar for next week. But, there is a problem. I have said several times that once a bull micro channel has 5 or more bars, the odds are that traders will buy the 1st pullback.
I also said that when the micro channel last about 10 bars, it is extreme. The bulls get exhausted. That is a problem for traders wanting quick, significantly higher prices.
Consequently, the rally from the 1st pullback typically struggles once it gets above the top of the micro channel. Traders expect a deeper, longer pullback to begin after a few bars up. As a guide, I look for about 10 bars and 2 legs sideways to down. That is about 2 months.
That is the case here on the weekly chart. The bear reversal bar from 2 weeks ago is a good candidate for the high for the next couple of months
Daily S&P500 Emini futures chart:
Emini parabolic wedge buy climax and loss of momentum
The daily S&P500 Emini futures chart has an interesting chart pattern. The March 21 huge bull bar was a one day buy climax. It followed an 8 bar bull micro channel, which is a bigger buy climax.
Look at the weekly chart. There was a 10 bar bull micro channel from the December low. That is an even bigger buy climax.
There are now 3 consecutive buy climaxes. Each is shorter in duration. This is a sequential buy climax pattern with the climaxes coming faster.
I think of it as a variation of an Emini parabolic wedge climax. A parabolic wedge rally is a tight bull channel with at least 3 legs. The daily chart is in a tight bull channel, and it has 3 buy climaxes. The climaxes are shrinking in duration, much as the legs in a wedge shrink.
As for a more traditional Emini parabolic wedge climax, the daily chart only has 2 clear legs up. The tops are the March 4 and 21 highs. If the Emini makes a new high within the next couple of weeks and reverses, the daily chart would then have a clear Emini parabolic wedge climax top. This is in addition to the sequential buy climaxes that currently exist.
A top or one more minor new high
What should traders expect over the next few weeks? There is already a credible top on the weekly chart. The daily chart has sequential buy climaxes. Also, it might have formed a micro double top and a lower high this week. The rally is stalling at 2825, where is has failed many times over the past 16 months.
Based on the weekly chart, a 2 month pullback has either begun or it will begin within a few weeks. The daily chart might also get one more new high to create a more traditional Emini parabolic wedge climax top.
These factors make it likely that either the high from 2 weeks ago is the start of a 2 month selloff, or there will be one more brief new high before the selloff begins.
Can the bulls get a new all-time high soon?
Can the rally continue up to a new all-time high without a 2 month pullback? Of course it can, and if it does, no one will be surprised. The 3 month rally is very strong and it came from a climactic reversal up from a monthly bull trend line.
However, remember that the Emini has been sideways for 16 months. My 80% rule says that 80% of strong legs in a trading range reverse. Also, the monthly chart is losing momentum as it tests the 2825 resistance. Therefore, there is better than a 50% chance of a 2 month pullback before there is a new all-time high.
Will the bulls get a new high this year? The 10 year bull trend has been incredibly strong. My 80% rule on inertia also applies to trends. Eighty percent of trend reversal attempts fail. Traders should therefore assume that there will be a new all-time high in the 2nd half of the year.
But, a trading range late in a bull trend is usually the Final Bull Flag. Therefore, the 2018 trading range will probably be the Final Bull Flag in the 10 year range. That means that there will probably be a major trend reversal down to around 2,000 that starts within 1 – 10 months after making a new all-time high.
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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 Intraday Market Update page.
Hi Al, thanks so much for an insightful update. Forgive my ignorance but i have to ask. You called last week on the weekly charts a high 1 bull flag. My question is, why is it not a high 2 bull flag as you had a high1 bull flag 2 weeks prior. Just trying to understand. Thanks for your answer.