The Emini daily chart had an extreme sell climax, but reversed up this week. Traders should expect the bear rally to create a trading range for several weeks. Then, there will probably be a break to a new low.
The bond futures monthly chart is in a bear rally. This could last for several months before the bear trend resumes.
The EURUSD weekly Forex chart is at the apex of a nested wedge. There will probably be a strong breakout up or down within the next few weeks.
The crude oil futures weekly chart crashed in a exhaustive sell climax. It will probably enter a $10 trading range for several months.
US Bond futures monthly candlestick chart:
Bear rally in head and shoulders top
The US 30 year bond futures candlestick chart has a massive nested wedge top. The odds are that interest rates have made the low and bonds have made their high for the next 20 – 30 years.
That does not mean that bonds collapse. As you can see, the monthly chart has been sideways for 2 years. Furthermore, the past 2 months have rallied. The rally will probably reach the September 2017 high area. At that point, the bears will sell again. That would create a double top lower high.
Because of the nested wedge top, the probability is that there would be a selloff below the March 2017/October 2018 double bottom. That is also the neck line of the Head and Shoulders top. Then, over the course of several years, there would be about a measured move down.
The first major target would be the September 2013 higher low. This is because it was the 1st pullback after a strong rally and it is around a measured move down.
EURUSD Forex market:
Tight trading range at apex of nested wedge bottom
The EURUSD weekly Forex chart is tightly balanced in a 9 week tight trading range. Prior tight trading ranges broke out after a similar duration. Therefore a breakout is imminent. Furthermore, the tight range is at the apex of a nested wedge bottom. Finally, Forex markets have a tendency to begin major moves just after New Year’s Day.
Consequently, traders need to be prepared for a breakout and a trend that could last many months. The first target for the bulls is the top of the 7 month trading range at 1.18. The bears initially want a 300 pip measured move down to 1.09 based on the height of the 9 week trading range.
It is important to realize that the initial breakout from a Breakout Mode pattern fails and reverses 50% of the time. In addition, there is a 50% chance of the eventual successful breakout being up or down. Once there is a clear breakout, it will probably last several months.
Crude oil market:
Probable Final Bear Flag in exhaustive sell climax
The crude oil futures weekly chart crashed over the past 3 months. This past week was a pause bar after a strong breakout from a 3 bar tight trading range. A tight trading range late in a bear trend is often the Final Bear Flag.
The odds are that the bears are exhausted. Exhausted bears typically take profits and wait several bars before selling again.
This sell climax is a test of the June 2017 low. It is therefore a good location for profit taking. The profit taking causes a short covering rally. If it is strong, bulls will begin to buy for a bear rally back to the Final Flag. Additionally, other bears will begin to panic out of their shorts. The result is often a quick move up to the target.
Because the 3 month bear trend is steep, the 1st reversal up is typically minor. Traders look for a test of resistance, like the Final Bear Flag or the 20 week EMA.
Once there, the bulls take profits and the bears begin to sell again. However, since sell climaxes usually evolve into trading ranges, the bears will take profits and the bulls will buy again around this week’s low. The result of bulls and bears buying low, selling high, and taking quick profits is a trading range.
After an extreme sell climax, the range could last several months. Its height initially will be about $10, from around this week’s low to the Final Flag high.
Monthly S&P500 Emini futures candlestick chart:
Big bear trend bar, but big tail below
The monthly S&P500 Emini futures candlestick chart has sold off sharply over the past 3 months. But, it bounced from the monthly bull trend line at the end of the month.
It also fell barely below a 20% selloff from the high. By convention, that means the stock market officially is in a bear market. However, a 3 month selloff on the monthly chart is not a bear trend. It is still simply a strong minor reversal.
All big selloffs end at monthly bull trend lines. However, they often need a micro double bottom or small double bottom before there is a trend reversal back up.
Furthermore, there are often 2 – 3 bull trend lines. Here, there is a lower trend line from the 2009 and 2011 lows. The space between those 2 lows is much smaller than the space between the 2011 low and current low. That lack of symmetry makes traders see it as a weaker magnet. Therefore, they are willing to buy now, believing that the Emini does not necessarily have to fall to the lower line.
This time is different!
I can’t count the number of times I have heard this over my 31 years as a trader. Every time the market does something unusual, you will hear some guy with 15 years of experience announce on TV that from his analysis, the market has changed.
It has not changed. This selloff will probably behave like all of the others. The odds are against an immediate resumption of the bull trend.
Computer algorithms do not create market moves
I have studied charts from over the past hundred years and have watched just about every tick for 31 years. The advent of computers can accelerate the movement, but it does not create the movement.
Just look back a couple of years ago. There were countless small days. If the computers could create big moves, they would have done it because they would have made more money.
Markets move based on logic. That has always been the case. There have been smart, rational buyers and sellers since markets were invented. If you chart out their trades, the charts from 10,000 years ago would be the same as those today.
Computers are not more logical than a group of tens of thousands of expert traders. The patterns today are the same as when I started and as they were 100 years ago.
If you don’t believe me, look at charts from the 1920s, but remove the time and price axes. Those charts look exactly as they do today. Both are a reflection of rational human behavior and have to look the same.
20% usually means 30%
Suppose you wrote a program that highlights every time the market rallies 6% from a low. What is the probability that it will immediately reverse back down to the start of the move? It is low. Most of the time, it will go at least a little higher before reversing.
The same is true for selloffs. Write a program to find all of the times it fell 5%. Then, how much further did each of those selloffs fall before going back to the old high? What you will discover is that if it falls 5% or any % that you choose, it usually will fall about 50% further before reversing. This is true for any size small to moderate selloff or rally.
The Emini fell 20% from the high this week and reversed up. Old timers know that it has fallen 20% 32 times since 1927. Of those times that it fell 20%, most fell at least a little further.
In fact, once the market falls 20%, the average final low is usually about 30% before there is a new high. Therefore, the final low in the current selloff will probably be below the December low.
Can the Emini test the 2014 – 2015 Final Bull Flag?
The odds are that this week’s strong rally will fail and there will be a new low within 1 – 3 months. For the past several years, I have said that the 2014 – 2015 trading range would probably be the Final Bull Flag. This is because a trading range late in a bull trend usually ends up being the final flag.
Typically, the bull breakout reverses back to the bottom of the flag. That low is around 1760, which is a 40% drop from the high. I still think the Emini will get there, but I have been saying that there might be one more new high 1st. In addition, the Emini might take a few years to reach the target.
As big as a 40% correction is, similar corrections come every 10 years or so. For example, the S&P fell 49% in 2002 and 57% in 2009. Therefore, 40% is not terribly unusual.
But, even with all of the selling over the past 3 months, the Emini is only halfway there. One more new high is still more likely before the Emini reaches that target. However, if the Emini continues down to 30% within the next few months, it will probably fall to the 1,800 target area.
Weekly S&P500 Emini futures candlestick chart:
Emini reversed up from sell vacuum test of bull trend line
The weekly S&P500 Emini futures candlestick chart formed a big bull buy signal bar this week. The bears broke far below a 50 bar trading range last week. If this week was a big bear bar, the bears would likely have gotten a 400 point measured move down.
Instead, this week was a big bull trend reversal bar. The bulls hope that last week’s bear breakout will fail. Furthermore, they want the climactic reversal to continue up to a new all-time high.
Minor reversal more likely than major reversal
The 3 week selloff was surprisingly strong. In addition, the prominent tail on the top of this week’s bar weakens the buy setup. Consequently, the 1st reversal up will probably be minor. A minor reversal means that the rally will either form a bear flag or begin a trading range.
A resumption of the bull trend would be a major trend reversal. The bulls currently have a 40% chance of achieving that goal without one more new low. Typically, they would need at least a small double bottom before they can get a major trend reversal. That means they will probably need a test back down to around this week’s low before they can resume the bull trend.
Trapped bulls above
All of the bulls who bought during 2018 are now holding losing positions. They expected the trading range to have a bull breakout. Many did not exit on the breakout below the February low because they thought it would fail. Instead, the Emini sold off relentlessly and much lower than they thought was likely.
Many were distracted by the holidays. They now are desperate to exit with a smaller loss. They want to sell out of their longs on a pullback to around the February low.
There are other bulls who bought the sell climax. They know that the reversal up is minor. They, too, want to sell to take profits at the resistance of the bottom of the yearlong trading range.
The bears expect a 2nd leg down after a big bear breakout. They took windfall profits on the collapse to the bull trend line. They will sell again around resistance.
Everyone wants to sell around the February low. That makes a successful breakout below the trading range more likely than a failed breakout.
The odds are that the rally over the next 1 – 3 weeks will end around the February low. There will then be a test of this week’s low. That test will probably lead to a new low. It might fall much further than what traders think is likely.
Daily S&P500 Emini futures candlestick chart:
Sharp bear rally after from extreme sell climax
The daily S&P500 Emini futures candlestick chart crashed down to the 7 year bull trend line on Monday, but reversed up violently on Wednesday. This was a parabolic wedge sell climax. The 1st targets for the bulls are the December 12 sell climax high, the 20 day EMA, the bottom of the 2018 trading range, and possibly the December 12 lower high, which was the start of the parabolic selloff.
A sell climax usually ends with a sharp reversal and then a trading range
The selloff had 10 consecutive bear trend bars. This has never happened in the 20 year history of the Emini. It was therefore unsustainable and climactic. The odds favored a sharp reversal.
This is similar to the buy climaxes on the daily, weekly, and monthly charts late last year. The S&P was the most overbought in its 100 year history on all 3 time frames. That is why I said that a correction was likely. When there was that final surge in January, I said that the top was likely within weeks. This is because the stock market has always behaved this way.
Extreme climaxes usually get extreme reversals. Typically, the market enters a trading range for at least 10 bars. While the current selloff has been extreme, the monthly chart has only gone sideways to down for 11 months. It will probably be in a trading range for at least another 10 bars or more. That means at least a year. It probably has not yet found the bottom.
Trading range more likely than bull trend
This week’s rally was dramatic. However, a Big Down move followed by a Big Up move creates Big Confusion. Confusion is the hallmark of a trading range. Traders buy selloffs, sell rallies, and take quick profits.
All that they think is likely is that every move will soon reverse instead of breaking into a trend. The exact location of the reversals is rarely clear in advance. The legs up and down often go further than what seems likely. Also, the reversals can be abrupt. Many traders use wide stops and scale in.
Buying low, selling high, and taking quick profits creates a trading range. That is what is likely on the daily chart after the current sell climax. The trading range could last 20 or more bars. It will probably have at least 2 legs up. The momentum up this week is strong enough to make higher prices likely over the next week or two.
But, since the rally is in a bear trend, the odds favor a new low within the next month or two.
Extreme moves scare buyers
There is one more important point. The violent moves up and down scare investors. While it is good for traders, investors are not eager to buy. This makes a resumption of the bull trend unlikely until after the volatility returns to normal for at least a couple months.
Many traders were shaken by December, but decided to wait for the new year to exit positions. They were hoping for a Christmas rally. However, most will conclude that 2 days up was disappointing. Consequently, there is a risk that many traders will give up in January. If they do, there could be another big leg down.
What do the bulls need for a major trend reversal up to the old high?
If the developing trading range lasts 20 or more bars, the bulls will have some type of a double bottom. At that point, there would be at least a 40% chance of a bull breakout.
This is true on the monthly chart as well. There, the Emini had a buy climax and then a 20% reversal down. Consequently, the monthly chart will probably be in a trading range for a year or more.
Can the Emini simply continue up to the old high? Probably not. When the selling has been as strong as it has been, the bears are confident and the bulls are scared. The result is that both will sell rallies.
Bear rallies can be surprisingly strong. Yet, a lower high is more likely than a new high. If, however, the bulls get 4 or 5 consecutive big bull bars closing near their highs, the odds would shift in favor of a new all-time high.
But, after all of the abrupt moves up and down this year, the new high would probably fail. All that the bulls would be doing is making the trading range a little taller. A trading range for many more months and possibly several years is what is likely at the moment.