Market Overview: Weekend Market Update
The Emini reversed down on Friday. This might be the start of a 5% correction, but there could be one more brief new high first.
Bond futures are reversing up but the rally will probably form a lower high.
The EURUSD Forex market is trying to resume its 2 year bear trend, but there will be buyers below the November and October lows.
30 year Treasury bond Futures market:
Bounce after 4 month pullback
The 30 year Treasury bond futures is reversing up in January after 4 consecutive bear bars on the monthly chart. Four is unusual when there has been a strong bull trend. I wrote last month that January would probably be a bull month. With only 5 trading days left in January, the month will probably be a bull bar closing near its high.
Since the selloff is also a pullback in a bull trend, January is a High 1 buy signal bar. However, after 4 consecutive bear bars, there will probably be sellers not too far above.
This is especially true since 2019 formed a parabolic wedge buy climax. That typically leads to 2 legs sideways to down. The 4 bear bars formed the 1st leg. Traders will look for a lower high over the next few months and then a 2nd leg sideways to down.
What is the current trend?
I have written many times over the past few years that the 30 year bull trend is ending. Traders should expect a decade or two of lower prices and higher interest rates.
I keep saying that a 30 year rally could take years of sideways trading before reversing into a bear trend. This transition has been going on for 4 years and there is no clear reversal down yet. There might be one or more new highs before the bear trend becomes clear.
It is important to understand that Americans will not accept zero interest rates. That will keep a cap on bond prices while the transition into a bear trend continues.
EURUSD weekly Forex chart:
Bear leg in 6 month trading range
The EURUSD weekly Forex chart formed a bear inside bar last week. It closed on its low and it followed 3 consecutive bear bars. This was a credible Low 1 sell setup. When this week traded below last week’s low, it triggered the sell signal. The bears are hoping that the 2 year bear trend is resuming after a 3 month rally to the top of the bear channel.
However, the EURUSD is also in the middle of a 6 month trading range. Traders have been looking for reversals every few weeks. Since this is the 4th week down, there are fewer bears willing to sell. Instead, they would rather begin to look to take profits and sell again after a 2 – 3 week bounce.
EURUSD monthly Forex chart: Low 1 bear flag
The January candlestick on the monthly chart closes in 5 trading days. So far, January is a big bear bar closing near its low. It traded above the December high and is now near the December low. If it falls below the December low next week, January would be an outside down candlestick on the monthly chart in a 2 year bear trend. That would increase the chance of lower prices.
I have not mentioned the 2 measured move targets and the gap around 1.08 on the daily chart recently (not shown). However, both are magnets below. An outside down month would increase the chance of the trend continuing down to that area.
While this is true, the past 6 months have been sideways. They therefore have formed a tight trading range. That is a bad environment for stop entry traders.
January is therefore a weak sell setup, even thought the monthly chart has been trending down for 2 years. There may be more buyers than sellers below the January low.
Traders have been buying every new low for 20 months. Therefore, there probably will be buyers below the October low, which is the bottom of the bear trend, and around the 1.08 magnets. The odds favor more sideways to down trading until the bulls get a strong upside breakout.
Monthly S&P500 Emini futures chart:
Strong bull trend, but minor profit-taking soon
The monthly S&P500 Emini futures chart is forming its 5th consecutive bull trend bar. While this means that the bull trend is very strong, it is also becoming extreme. The tail on top of the January candlestick is a sign of a loss of momentum soon.
There are 5 trading days left in January. If Friday’s selling continues next week, January could have a bear body when it closes next Friday. If so, it would be a sell signal bar for February.
However, after 4 strong bull bars, the 1st reversal down will probably be minor. That means it would probably only last a bar or two. But on the monthly chart, that means 2 months, and it could be well over 100 points.
The bears typically need at least a micro double top to get more than a 1 – 2 bar pullback when a bull trend is strong. Traders expect the downside risk over the next several months to be small.
Weekly S&P500 Emini futures chart:
Emini profit taking and 5% pullback after January buy climax
The weekly S&P500 Emini futures chart formed a bear bar this week after 2 big bull bars closing near their highs. I mentioned last week that a pause was likely this week. Those 2 bull bars formed the strongest breakout in the 4 month bull trend. That typically attracts profit-taking, but there is often one more brief leg up before it begins. Traders are likely begin to take some profits soon. They might have begun on Friday.
There is a parabolic wedge rally to a Leg 1 = Leg 2 measured move. Traders see this is a logical area for some profit-taking.
It is important to note that many computers see the 2nd leg up as beginning with the October 3 low instead of the June low. Their Leg 1 = Leg 2 target is near 3500 (not shown). The bulls have a good chance of reaching it later this year.
Last week’s bear body is a sell signal bar. Because of the prominent tail below and the tight bull channel, this is not a strong sell setup. Furthermore, there is still a 40% chance of one more brief new high before the 5% correction begins. But traders should expect at least a couple weeks of profit-taking soon.
Those 2 big bull bars late in a bull trend are similar to the pair of bars in early January 2018. At the time, I said that there would probably be a 5% correction beginning in a few weeks, but there might be one more brief push up 1st. As you can see, the bulls got that brief final push up and then the Emini sold off 10% over the next month.
The chart pattern and the context (late in a buy climax) are the same this time. Traders should expect something similar.
Where is support?
The 1st target after a reversal down from a buy climax is the bottom of the most recent leg up. That is the low of the 2 bull bars, which would be a test of around 3,200 and last year’s close. That is close enough to a 5% correction to make many bulls wait for the selloff to reach 5% before buying again.
The size of a pullback matters
Traders pay attention to the size of pullbacks. Certain numbers are support. For example, there were several pullbacks over the past 2 years that were almost exactly 10% or 20%. That tells you that traders were looking to buy a 10% or 20% pullback.
Other common pullbacks are 2% and 5%. Since this bull trend has lasted so long, the pullback will probably last at least a couple weeks and test the low from 3 weeks ago. Therefore, 5% might be the number where the bulls will look to buy again.
Buy climax and now a possible top
Bull trends and buy climaxes can last a long time, but not forever. This buy climax has lasted 4 months, which is unusually long. It increases the chance of profit-taking and a pullback soon, and it might now be underway.
It is important to understand that there is no reversal down yet on the weekly chart. The bears currently only have a weak sell signal bar.
Also, markets have inertia. That means they resist change. When there is a strong bull trend, most attempts to reverse will form a bull flag or a trading range, not bear trend.
Additionally, even if the bears get a 5% pullback, traders will buy it. Strong bull trends usually do not instantly reverse into bear trends. There typically will be a transition into a trading range first. Consequently, the downside risk over the next couple months is not great.
Daily S&P500 Emini futures chart:
Small Pullback Bull Trend, but profit-taking soon
The daily S&P500 Emini futures chart has been in a Small Pullback Bull trend for 4 months. Traders have bought every 1 – 3 day pullback for 4 months.
The bears now have a big outside down bar on Friday. But it has a prominent tail below and so far, the pullback has lasted only 2 days. There is still a 40% chance that the bulls will buy it next week. If so, their buying could lead to another high before there is a 5% pullback.
Monday and Tuesday are important. If either is a big bear day, the odds will favor a 5% pullback within a couple weeks. On the other hand, if either is a bull bar closing near its high, traders will begin to think that Friday was a bear trap. Many traders would buy above the bull bar and bet that the Small Pullback Bull Trend is still intact.
3,300 is resistance
In early January, the bulls tried for several days to break above 3,300. I discussed this at the time in the chat room. I said that it meant that traders saw 3,300 as an important price.
The Emini gapped above it on January 16, but there was no follow-through buying. Traders were wondering if the breakout would hold. The bulls tried to reverse up from it on Thursday, but the bears broke strongly below it on Friday. It is now short-term resistance.
Why 3,300? I don’t care. All that matters is that traders see it as an important price. It therefore might be important for the next several months.
What does that mean? Well, if the Emini sells off strongly from here, traders will expect it to get back to 3,300 within a few months. Alternatively, if the bulls rally far above it over the next few weeks, there will probably be a pullback down to it within a couple months. It looks like traders care about it.
Emini reversing down from top of bull channel
Since the Emini was at the top of the bull channel on the daily chart, traders expected a sideways to down move. Friday’s selloff already reached the minimum targets, which are the middle of the channel and the EMA.
Because the channel is so tight, the bottom of the channel is not far below. The Emini will probably reach it within a couple weeks by going sideways or down.
Normally, traders would expect buyers there. But because the chart is so climactic, there is an increased chance of a break below the bottom of the channel.
The next support is the bottom of the most recent leg up. That is the January 6 low, just above 3200. A test of that area would be about a 5% correction and a test of the 2019 close.
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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.
The similarity with Jan. 2018 is striking. Back then I sold a large portion of TXN almost exactly at its peak! Thanks to Al I could finance my daughter’s tuition out in CA. It seems history repeats itself.