Al added a few comments to report
Market Overview: Weekend Market Analysis
The SP500 Emini futures broke far below the bull trend line and December 2020 low on the weekly and daily chart. It was a Surprise Bear Breakout which typically leads to a second leg sideways to down. The next target for the bears is the October 2020 low. Bears hope that this is the start of the bear trend. Bulls want this to simply be a sell vacuum test of the developing trading range which started in July 2021.
The EURUSD Forex was a bear inside bar with a prominent tail below. The bulls failed to get follow through buying and the EURUSD has traded back into the 7-week tight trading range. Bears need another follow-through bear bar closing near its low next week to increase the odds of a breakout below the tight trading range and a continuation of the 700-pip measured move lower. Bulls hope that this is simply a deep pullback following last week’s breakout above the tight trading range and want another leg sideways to up.
The EURUSD weekly chart
- This week’s candlestick on the weekly EURUSD Forex chart was a bear inside bar with a prominent tail below closing below the 7-week tight trading range high. The bulls did not get follow-through buying after last week’s breakout above the trading range.
- The prominent tail below indicates that the bears are not as strong as they could have been.
- We have said that a tight trading range is an area of balance and a breakout mode situation. There is a 50-50% probability of a bull and bear breakout. It also means that there is a 50% chance that the first breakout up or down will fail and reverse. It appears the breakout last week is failing.
- The bears are hoping last week’s test of the bear trend line was simply a double top bear flag (November 30 and January 14) to be followed by a continuation of the 700-pip measured move lower.
- This week’s candlestick closed slightly below the middle of the bar and is a reasonable sell signal bar for next week. Bears need follow-through selling in the next few weeks. The first targets are the higher low on January 4th followed by a test and break below the 7-week trading range low.
- In the last 9 weeks, bears have not been able to get consecutive bear bars. If they get that next week, it increases the odds of a test of the trading range low.
- However, a tight trading range late in a trend often is the final flag of the move. Even if there is a break below the 7-week trading range, odds are it might be the final flag of the bear leg. The EURUSD may then test below June 2020 low before there is a stronger reversal higher from a lower low major trend reversal.
- The bulls are hoping this is simply a deep pullback following last week’s breakout. They want another leg up and a breakout above the Jan 14 high. If they get that, then the rally will probably last at least a couple of months and reach the October 28 lower high.
- Al has been saying that there should be a sideways to up move lasting at least a couple of months. It went sideways for 2 months plus.
- The EURUSD is in the middle of a 7-year trading range. The 2021 selloff is still more likely a pullback from the 2020 rally than a resumption of the bear trend that began 14 years ago.
- The next 1 to 2 weeks should provide more clarity as to whether the bears can create consecutive bear bars closing near the lows thereby increasing the odds of a breakout below the trading range or if they fail to do so thereby increasing the odds of another upside breakout attempt.
The EURUSD daily chart
- The EURUSD stalled at the bear trend line last week and continued lower into the trading range this week forming another higher low on Friday
- The bears see the current move as a failed breakout above the 7-week tight trading range and a lower high test of the bear trend line and breakout point. They want a test and breakout below the 7-week tight trading range low followed by a continuation of the 700-pip measured move lower.
- They were able to get consecutive bear bars and follow-through selling on Mon-Tues. The bear bars this week have closes near their lows.
- The bears see the pullback on Wednesday and Friday and a small double top bear flag and want at least another sideways to down leg which will test the 7-week trading low.
- If there is a break below the 7-week tight trading range, odds are it will be the final bear flag of the bear leg followed by a stronger reversal higher from a lower low major trend reversal, probably from slightly below June 2020 low.
- The bulls hope that this is simply a deep pullback following last week’s breakout above the tight trading range. They want another leg higher and breakout above the January 14 high towards the November 10 and October 28 lower high above.
- So, which is more likely? We have said that a trading range is an area of balance and a breakout mode situation. There is a 50-50% probability of a bull and bear breakout. It also means that there is a 50% chance that the first breakout up or down will fail and reverse. So far, the first breakout above reversed back into the trading range.
- Traders need more information therefore more bars on the chart before they decide on the next breakout of the trading range.
- Al has said that the EURUSD would probably not continue down to last year’s low without first going sideways to up for a couple of months and it went sideways for 2 months plus. Is that enough of a correction for the selloff to continue straight down? The bears have a 40% chance.
- It is more likely that either the current bull breakout will continue up or that a break below the 7-week tight trading range will reverse up within a few weeks from a final bear flag. The odds still favor that the EURUSD would rally for a couple of months.
S&P500 Emini futures
The Monthly Emini chart
- The January monthly Emini candlestick currently is an outside down bar after an outside up December. This is an OO (outside-outside) pattern, which means Breakout Mode. It is the 3rd reversal since September therefore a micro wedge.
- We have said that the bears want a reversal lower from a micro wedge even though January traded slightly higher first. They want January to be a failed breakout above December outside up bar, like November. A third reversal has a higher probability of working.
- Al said that the current OO pattern follows an OO pattern in October. Consecutive attempts at a top in a buy climax have an increased chance of a reversal down. January is the sell signal bar for the OO. If February or March trades below the January low, it would trigger the OO sell signal. The minimum target is a measured move based on the height of the OO, which is January’s range.
- That would lead to a test down to the October 3 low and possibly the gap above the March 2021 high on the monthly chart. That is also just below the 4000 Big Round Number.
- There are another 6 trading days left in the month. It is probably too far for the bulls to trade above the open of the month. The bulls want to prevent the month from closing near the low. At the very least, they want a close above the middle of the month’s range around 4600. That is also the middle of the 3-month trading range therefore a magnet.
- If they get that, January will have a prominent tail below and indicates the bears are not as strong as they would like to be.
- The bulls want a continuation higher to a measured move target (using the Aug-Oct trading range height) which will take them to 4930 near the top of the trend channel line. However, if January closes near the low, the odds of this happening in February or March is less likely.
- Al has said that the bull trend on the monthly chart has been very strong. Therefore, even if there is a sharp selloff down to the October low in the 1st half of this year, it should be minor. Even if it sells off for a 10 to 20% correction, that would still only be a pullback on the monthly chart even though it could be a bear trend on the daily chart and not continue straight down into a bear trend.
- The best the bears will probably get on the monthly chart is a trading range for many months to around a 20% correction down to the gap on the monthly chart below April 2021 low and around the 4,000 Big Round Number.
- A trading range in a bull trend is usually a bull flag. Therefore, traders should expect a bull breakout of the trading range later in the year.
- We have said that this rally is overextended and there is a likely micro wedge forming which makes it less likely it will continue up throughout 2022 without a pullback.
- Therefore, the bull trend will probably transition into a trading range for at least a couple of months. It may have already begun.
- For example, if the market were to get down to the October low or slightly lower, then the trading range would have begun in August and there would be a six- or seven-month trading range on the monthly chart.
- At that point, the bulls will try to get a resumption up from a double bottom bull flag and the bears will try to get a bigger reversal down.
- Al has said that the bull trend from the pandemic crash has been in a very tight bull channel. The first reversal down will probably be minor even if it lasts a few months.
- The gap up in April 2021 could lead to a measured move up to 5,801.5 before the bull trend finally ends.
The Weekly S&P500 Emini futures chart
- This week’s Emini weekly candlestick was a big surprise bear breakout bar closing near the low breaking far below the bull trend line and December’s low. It is a strong sell signal bar for next week and it may gap down at the open on Monday. Small gaps usually close early.
- The bears need next week to be another bear follow-through bar to confirm the breakout below the bull trend line.
- Al said that if there is a gap down and the bears keep it open for a couple of weeks, it could become a measuring gap. With this week’s low at about 400 points below the all-time high, a measured move down would be around the 4,000 Big Round Number.
- The bulls hope the breakout is just a bear trap. They want a strong bull reversal bar next week even though next week might trade slightly lower first possibly from a double bottom bull flag with October low which is also around the 50-week moving average.
- With this week closing near the low, odds are the Emini should trade at least slightly lower.
- Al said that there is often a reversal up after a breakout. Therefore, the Emini might rally strongly for a week or two.
- A 50% retracement of the selloff will bring the Emini back into the middle of the 3-month trading range around 4600 which is a magnet above.
- However, the selloff has been strong and was a Surprise Bear Breakout which usually has a second leg sideways to down after a pullback (bounce).
- Al has said that the Emini has been in a strong bull trend since the pandemic crash. There have been a few times when the bears got the probability of a correction up to 50%, but never more. The probability of higher prices has been between 50 and 60% during this entire bull trend. It has never been below 50%. That continues to be true.
- The strong selloffs, like in September 2020 and again in 2021, pushed the probability for the bears up to 50%. But every prior reversal has failed, and the bears never had better than a 50% chance of a trend reversal.
- The Surprise Bear Breakout may have increased the odds of a correction back to 50% or just slightly more. Typically, the correction is already half over by the time traders realize it is underway.
- However, the best the bears probably can get this year is a 20% correction down to around the 4,000 Big Round Number.
- For now, the bears need another follow-through bear bar next week to confirm the breakout below the bull trend line.
- If next week is a big bull bar closing near the high, especially above this week’s high, it would be a high 1 buy signal bar from a twin reversal bar setup.
The Daily S&P500 Emini futures chart
- The Emini broke below the 100-day MA and the bull trend line to test the 200-day moving average. This was the first time the 200-day MA was tested since June 2020.
- The selloff from the wedge top is strong enough for traders to expect at least a second leg sideways to down move.
- This week broke below December’s low. The Emini is now in a trading range that started in July 2021.
- The next target for the bears is the October low. It may reach there soon. The bears hope that this is the start of the bear trend.
- Al has said that since the 200-day MA is important support, the Emini might rally sharply for a few days next week, especially after 4 big bear days.
- The bulls hope that this selloff was simply a sell vacuum test of the trading range low which started in July 2021. As strong as the selling is, they want the selloff to simply be a bear leg in the developing 6-month trading range.
- They then want a double bottom bull flag with October low and a rally to re-test the trend extreme.
- However, there is a 7-bar bear microchannel since January 12 and the move down from the high is in a tight bear channel which means strong selling. Bulls will need at least a micro double bottom or a strong bull reversal bar closing near its high before they would be willing to buy aggressively.
- Since Friday was a bear bar closing near the low, Monday may gap down at the open. Small gaps usually close early in the week.
- Al said that the entire rally from July looks like a bull leg in what will become a trading range. Trading ranges often begin before bull or bear trends end.
- For the Emini to evolve into a trading range, it needs a bear leg. Once the bear legs start to fall below prior lows, like the December 3 low, traders will conclude that the bull trend has evolved into a trading range. The Emini should then fall to the October low or slightly lower. So far this remains true.
- However, it will probably form a double bottom bull flag with one of those significant prior lows instead of continuing down into a bear trend.
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Weekly Reports Archive
You can access all weekly reports on the Market Analysis page.
This selloff in the Emini is a second leg. You can see it clearly on the daily chart and even the weekly chart where the bull doji is the bounce between the two legs down.
Hi Andrew, good weekend to you.
1) Yup, it is the second leg down on the daily chart.
2) I’m assuming you are referring to the part where the spike down is strong enough that traders expect at least another sideways to down leg?
3) The statement is correct and is a common occurrence.
4) Sometimes buyers buy even without a micro double bottom or a second leg lower, and that would turn into a v bottom, but it is rare not a common occurrence.
Cheers. Have a great week ahead.
As you know, the market sometimes has a small spike down and then a collapse, and that is the end of it. For example, traders can look back at December 2018 when there were 10 consecutive bear bars and then a V bottom. There was a sharp bounce and then a brief higher low major trend reversal up into a strong bull trend.
That is rare. More often, there is a bounce for at least 5 to 10 bars, and then a 2nd leg sideways to down. It will probably form a lower low.
The bears want to test the breakout point, which is the pre-pandemic high. While I do not think the current bear trend will get there, there is a 50% chance it will get below 4,000.
I think there will be at least one more new high before the Emini enters a trading range for 10 years. That new high should come in the 2nd half of this year. If not, then early next year.