Market Overview: Weekend Market Update
The Emini bulls are determined to test the gap on the weekly chart above the February 24 high. Many bears have been waiting for that test. Once in the gap, there is a 50% chance of a new high and a 50% chance of a correction down to 2700.
Bond futures have been in a tight trading range for 4 months after reversing down in March from the most extreme buy climax in history. Bonds have been drifting up, but they will probably stay in a range for the rest of the year.
The EURUSD Forex market has rallied in a wedge bull channel to the March high on the weekly chart. But even if the bulls break above the March high, the EURUSD will probably be in a trading range for the next year. The top of the range should be around 1.18 and the September 2018 high, which was the start of the 2 year bear channel.
30 year Treasury Bond futures weekly chart:
Weak rally to top of 4 month trading range
The 30 year Treasury bond futures market has rallied for 7 weeks on the weekly chart. The bulls hope that this is a resumption of the 2020 bull trend. But so far, the rally does not have consecutive big bull bars closing on their highs. It looks like a leg in the 4 month trading range and it is now simply testing the top of the range.
The bulls need a couple big bull bars closing on their highs to convince traders that the bull trend is resuming. There is currently a 60% chance that it is not, at least not yet.
4 month tight trading range on the monthly chart
It is important to understand that the January to March rally was the most extreme buy climax on the monthly chart in the history of the bond market. The huge reversal down in late March is a sign that the bulls aggressively took profits.
When there is an extreme profit-taking selloff after an extreme buy climax, traders are confused. Will the bulls buy again, creating a resumption of the bull trend, or has the bull trend ended? No one knows.
However, traders believe that the bulls are exhausted. Exhausted bulls like to see the bears make a couple credible attempts to create a bear trend before thinking about buying again. These 2 legs down typically take about 10 bars, which is around a year on the monthly chart. Therefore, the bond market will probably be sideways for the remainder of the year.
What happens after a year of sideways trading?
What happens after a year of 2 legs of sideways to down trading? Traders will decide if the 2 legs down are the start of a bigger move down or simply a bull flag.
If the selloff does not look particularly strong, the bulls will buy again. But even if they get a new all-time high, it will probably be small and brief. America will not tolerate negative interest rates and that will keep a cap on bond prices.
Also, if there is a new high, it would be the 3rd leg up from the 2018 low. Furthermore, the 3 year bull channel has been tight. Consequently, traders will then expect a reversal down from a parabolic wedge buy climax.
What if March was the end of a 30 year bull trend? The 1st target for the bears is the bottom of the most recent buy climax. That is the January low. Since that is far below the current price and the bond market now has small bars, the bears will probably need a year to get there.
Below that is the bottom of the 2014 – 2018 trading range. A trading range late in a bull trend is often the Final Bull Flag. Its low is a magnet once there is a reversal down. If the selloff to the January low continues down, the next target is the 2018 low. Because that is far below the current price, the bond market would probably need 2 – 3 years to get there.
EURUSD Forex weekly chart:
4 month rally, but possible wedge rally to a double top
The EURUSD Forex weekly chart has rallied for 2 weeks after forming an ii bull flag in early July. An ii pattern is a pair of consecutive inside bars. It is a Breakout Mode pattern. Since the breakout has been to the upside, it is an ii bull flag.
The breakout above the June high is good for the bulls. They want the rally to break above the March high. Not only that, they want consecutive closes above the March high. They would prefer those closes to be far above that high. If they succeed, traders will conclude that the 2017 bull trend is resuming.
Possible wedge rally to a double top
The EURUSD Forex market rallied strong in late March. The top of the March 27 big bull bar might be the 1st leg up in a wedge rally. June 10 is a possibly 2nd leg. This coming week could be the 3rd and final leg of the wedge bull channel. If the bears get a reversal down in the next couple weeks, it will be from a wedge rally on the daily chart.
Also, the July rally would then be a double top with the March high. It is important to note that the 2nd leg up in a double top often is a wedge rally. There is then both a double top and a wedge top. That has a higher probability of leading to a 2 – 4 week selloff. Furthermore, if there is a selloff, it will probably have at least a couple legs down and test the bottom of the June/July trading range around 1.1150.
Trading range on monthly chart is more likely than a bull trend
There is a 30% chance of the bulls achieving their goal of resuming the 2017 bull trend. Why is it not higher? Because the 2 year bear trend was a Spike and Channel pattern on the monthly chart.
The channel began with the September 2018 high, just above 1.18. When there is a reversal up from a Spike and Channel bear trend, the rally typically tests the start of the bear channel and then the rally stalls. Traders expect a trading range for many bars afterwards.
This means that the 2 year bear channel will probably be simply a bear leg in a 3 – 5 year trading range. It also means that the current rally will probably be a bull leg in that same trading range. Finally, the trading will will probably last many months after it tests the September 2018 high, if it gets there.
Has the 2 year bear trend ended? After 3 consecutive months that have traded above the high of the prior month, it probably has. The bear trend can resume or the 4 month rally could be the start of a bull trend. But because of the Spike and Bear Channel, the EURUSD monthly chart will probably be sideways for at least another year.
Monthly S&P500 Emini futures chart:
Probably sellers above the June high
The monthly S&P500 Emini futures chart has rallied strongly for 4 months from the below the bottom of its 3 year trading range. It is now just below the top of the trading range.
I have made the point many times that the size of the bodies has been shrinking from April through June. That is not what bulls want to see. The shrinking bodies represent a loss of momentum.
If you are a bull, you want the rally to continue to far above the old high. Ideally, you want the bodies to stay big or even get bigger. Also, you want each bar to close on or near its high. That indicates that traders are buying right up to the final days of the month. They do that because they are confident of higher prices in the next month. Because that did not happen in June, there might be more sellers than buyers above the June high.
Shrinking bodies and a big tail on top of a bar, like June, indicate that traders are selling before the end of the month. The selling is a combination of bulls taking profits and the bears betting on a reversal down.
Why would the bulls take profits if they believe the next month will be higher? They wouldn’t. Consequently, a lot of bulls are unwilling to take that bet. This hesitation on the part of the bulls increases the chance of a reversal back down to the middle of the 3 year range.
In a trading range, traders expect reversals
When the stock market is in a trading range, traders expect reversals up from around prior lows and down from around prior highs. There is often a breakout before the reversal. That happened with the February high and with the March low. Therefore, if there is going to be a reversal down this summer, it might come from above the February high instead of from a lower high.
I have written many times that the small body in June and the big tail on top of the June candlestick made it probable that July would not close far above the June high. This is true even though July has broken above the June high.
The month is only half over and the bulls can still get a huge bull bar in July. So far, July is trading at the high of the month. But there are 2 weeks left and the month can look very different once the candlestick closes.
For example, June had a big bull body early in the month. It reversed down strongly on June 11 and never got back to the high of the month. This created the big tail on the top of June’s candlestick by the end of the month.
Weekly S&P500 Emini futures chart:
Testing the February 24 gap, but probably not much higher
The weekly S&P500 Emini futures chart has been in a bull trend for 4 months. The V bottom rally is now near the February all-time high, which is also the top of a 3 year trading range.
There was a huge gap down on the weekly and daily charts on February 24. Since that time, I said that a huge gap at the start of a strong bear trend is an important magnet. I thought that the Emini would get back there within a couple years. Instead, it is reaching the target after just 6 months.
While the bears have been trying to get a reversal down for 7 weeks, their attempts have failed. The Emini is still in a 4 month Small Pullback Bull Trend on the weekly chart.
Since early June, I have said that many traders will keep buying every reversal down because they expect that the Emini cannot escape the magnetic pull of that gap. Why sell below the gap if you think that the Emini will go higher and reach the gap?
Will the rally continue up to a new high? That really does not matter. Unless the Emini breaks strongly above the old high, it will probably begin to turn down from somewhere above the February 24 high. The top could be above or below the February high.
2 failed attempts at an island bottom
The Emini did something subtle but important in both of the past 2 weeks. It gapped up on Monday. This formed a 4-month island bottom with the February gap down. However, the gap closed by the end of the day, ending the island bottom. It did the same thing the week before.
It is very unusual to make 2 consecutive attempts at an island bottom and have both fail. This is important, but easy to overlook. It is a sign that something is wrong with the bulls.
The Emini might gap up again on Monday, July 20. That would be the 3rd consecutive week when the bulls tried to create a 4 month island bottom.
Even if there is a gap up and it stays open all week, the location at the top of a 3 year trading range is bad for the bulls. Therefore, the July gap up will probably close within a couple weeks.
These failed attempts at a strong bull breakout increase the chance of a reversal down this summer. However, it probably will not happen until after the Emini tests into the gap above the February 24 high.
Trading range price action since April
The candlesticks since late April are weaker than those of the 1st 4 weeks of the rally up from the March low. There have been many bars with prominent tails or bear bodies. Also, the Emini went sideways for several bars in May and again in June.
This type of price action is more common when the rally will end up being in a trading range. The rally is probably a bull leg that will become part of a trading range. Traders therefore expect a bear leg to begin this summer.
Targets for the bears
If there is a bear leg, it could simply test down to the June 15 higher low. That is the bottom of a 5 week trading range and the bottom of the most recent leg up. A trading range late in a bull trend is often the Final Bull Flag. Its low is a reasonable target for a retracement.
When a rally in a trading range reverses, the selloff often reaches the start of the trading range bars. That is the April 24 doji candlestick on the weekly chart. The low of that bar came on April 21.
Additionally, a bear leg in the 3 year trading range should test down to around the middle of the range. That also is around that April 21 low, and that is about a 50% retracement of the 4 month rally.
Finally, it is 20% down from the all-time high. If the market is 20% below the high, it is in a bear market. Therefore, that is also an important price. Markets like to test important prices. If there is a reversal down from around the February 24 gap or the all-time high, traders will look for a move down to 2700 – 2800.
Daily S&P500 Emini futures chart:
Weak rally to the February 24 gap
The daily S&P500 Emini futures chart has been in a weak rally since the June 15 low. But it has also been sideways since early June. The bulls hope that the 4 month rally will continue up to a new all-time high.
However, the bears expect a double top with the February all-time high. They do not care if the 2nd high is a little above or below the February high. Legs in trading ranges often extend beyond the range before reversing. It would surprise no one if the reversal down came from a new high.
The bears believe that this rally is an exhaustive buy climax and that the 3 year trading range is intact. Trading ranges have legs up and down. The bears see the 4 month rally as just a leg in the 3 year trading range and therefore are looking for a bear leg to begin soon.
The importance of the February 24 gap
The gap above the February 24 high is big and it was the start of the pandemic crash. It is therefore a very important price.
When the Emini gets close to an important support or resistance level, traders like to see the move reach that level before looking for a reversal. Many bears feel this way. If enough do, there could be aggressive selling from above the February 24 high.
The bears might wait a week or more to see if the break into the gap will be strong enough to continue up to a new high. But at some point, if the Emini stalls, there might be strong selling. The bulls who bought wisely back in late March will take profits. Those who bought poorly in February will give up on their hope of getting out at their entry price, and they too will sell. Finally, many bears think that this rally will form a double top with the February high.
No one yet knows if the selling will be enough to begin correction back down to the middle of the 3 year range. However, whenever the market is deciding between a big breakout and a big reversal, traders assume that there is a 50% chance of either outcome.
The un-importance of the election
You cannot ignore the election, which theoretically affects the stock market. But much less than people think. I posted the above chart 2 weeks ago to show how much stronger the stock market was under Clinton and Obama than under the 2 Bushes and Trump.
You could surmise that republicans mess things up. But the correct conclusion is that the president’s party is not important.
The economy is sacred to the American people. No president is going to screw it up. We’ve designed a system that minimizes the damage any one idiot can do, no matter how much he tries to please his base and ignore everything else.
Trump is campaigning on how bad Biden will be for the stock market. Well, most people believe Biden is going to win the election. If he was going to be terrible, the Emini would be down at the March low, not up at the all-time high. No one cares.
It does not matter if Trump or Biden wins. American businesses are far more important than whatever fool lives at 1600 Pennsylvania Avenue. The only reason rich people care who wins is because politics are fun and they want someone as president who shares their values. They do not believe the outcome will affect their portfolios all that much. The stock market is telling us that.
Is July going to be the top for several months?
The timing of this is interesting. Since the Emini got within 10 points of the gap this week, it will probably enter the gap in July. Also, there is a tendency for the market to have selloffs in the August through October time frame. The 1929 Crash and the 1987 Crash both were in October. Both crashes had more than a 10% selloff in August. We are entering that window. Also, as I said, the Emini is overbought and it might try to become more neutral ahead of the election.
All of these factors favor a reversal down to the middle of the 3 year trading range within a few months. Larry Williams, who is a well-known trader, uses his own reasoning to come to a similar conclusion. He recently said that he expects the market to rally to around the old high into around July 27 and then turn down.
But why is the market still going up? Liquidity. I have said many times that the single most important factor over the past 4 months is Fed Governor Neel Kashkari’s statement on 60 Minutes in March that the Fed has “an infinite amount of cash” to protect the economy. But as powerful as the Fed is, it will not bother to stop a 15% correction. Therefore, a pullback to 2700 can take place, despite the Fed’s proclamation.
Traders can see the end of the day bar-by-bar price action report by signing up for free at BrooksPriceAction.com. I talk about the detailed Emini price action real-time throughout the day in the BrooksPriceAction.com trading room. We offer a 2 day free trial.
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.
Do you believe that the market could be in a final flag for the last 7 weeks after the strong rally, leading to a HH MTR above the February high. A potential wedge top could follow this pattern along with your blue expanding triangle line on the monthly chart but possibly using the February high. There are a few points of confluence that I can see, what do you thoughts on my thinking?
I thought I said exactly all of that, but I probably was not clear enough. I know have said all of the pieces at different times over the past month.
I think there is a 60% chance of entering the gap. If so, then there would be a 50% chance of a new high and a 50% chance of a reversal. There would be a wedge rally to a double top and the minimum target would be the June low. The June trading range is a good candidate for a Final Bull Flag. If there is a reversal down to the June low, then there would be a 50% chance of a move to around 2700.
Question: Do so called ‘manipulated’ markets still have tradable price-action?
e.g. Silver, Bitcoin, the Fed manipulated market in general.
Even Bitcoin has reliable patterns. That is the poster child of a market that can be manipulated because it is not very big and there is a handful of very big players, each with the ability to move the price, at least briefly.
I used to write about it in my weekend updates last year and it behaved well. It still does.
Manipulators cannot hide what they are doing. If they are driving the market up or down, it is obvious, and traders simply trade in that direction.
Hi Al, from your experience have you ever seen an island bottom not get tested, I am specifically talking about the April 1st-3rd island. Is there potential for that gap to stay open for the next 1-2 years or even indefinitely?
My general rule is that 75% of all prices get tested, so that means gaps and island tops and bottoms. The stock market has been in a bull trend since it began hundreds of years ago. That means there has been an endless series of higher lows. On a small enough timeframe, there have been many island bottoms that are still open.
On the weekly chart? Maybe, but probably less than 25% stay open. They are rare on the weekly chart so the sample size is small.
Since the market has been in a bull trend forever, 100% of island tops close because there is always going to be a new high.