Monthly S&P500 Emini futures candlestick chart:
Big, but brief reversal
Prior to this week, the monthly S&P500 Emini futures candlestick chart had been in a 16 month bull micro channel. This means that every month had a low above the low of the previous month. This has never happened in the 122 year history of the Dow Jones Industrial Average or the 96 year history of the S&P index. It was unsustainable and therefore climactic.
Yet, it is a sign of a very strong bull trend. The bulls have been so aggressive and confident that they were buying above the low of the prior month for more than a year. Once they believe that the bears will be unable to reverse the trend, they will become eager to finally be able to buy this pullback. The 1st reversal down in a bull micro channel usually lasts 1 – 3 bars (here, months). Then, the bull trend resumes. However, when a micro channel lasts more than 10 bars, it is extreme. There is an increased risk that the pullback could be deep and last longer than expected. For example, it might retrace more than 50% of the height of the micro channel and last 5 or more bars (months).
Buy The Close Bull Trend
In addition to the rally being a 16 month bull micro channel, it was reasonable for the bulls to buy the close of every big bull trend bar. This is therefore a Buy The Close Bull Trend. Since January was huge, it was climactic. Buying its close was reasonable only if a trader was willing to use a wide stop and scale in lower. For example, if the selloff lasts 6 months, a Buy The Close bull might buy more above a strong bull bar. There would be an 80% chance of a test back up to the highest close (the January close). This would allow the trader to exit breakeven on his final Buy The Close entry and with a profit on his lower entry.
Once there is a rally, the bears will try to form a double top with the January high. They know that the bulls are disappointed by the strength of the selloff. They expect the bulls to take profits at the old high instead of buying high and expecting a breakout. This month’s strong selloff results in a trading range mentality for at least 5 – 10 bars. Therefore, a break to a new all-time high will probably test back down within a few months instead of continuing the bull trend.
Only 20% chance of bear trend without at least a micro double top
Traders should know that there is only a 20% chance of a strong bull trend reversing into a bear trend without at least first forming a micro double top. This means that the bears will need at least a test of the old high before they have more than a 20% chance of taking control.
I am talking about the monthly chart. They clearly are in control on the daily chart. But since the monthly chart should resume up within 1 – 3 months, the sharp selloff on the daily chart will be brief. I have said many times that the correction would be at least 5% and probably closer to 10%. It hit 10% this week. I also said that it could be 20%, but that the bull trend is so strong that the bulls will buy even a 20% selloff.
The selloff is technical, due to going too far, too fast
I always enjoy it when the market confirms that its past behavior predicts its future behavior. Since market movement (price action) is a reflection of rational human behavior, tendencies repeat. It is genetically based, and it is the foundation of technical analysis.
I wrote repeatedly in January that the stock market had never been this overbought on the daily, weekly, and monthly charts in its 100 year history. The January 27th title of the section on the monthly chart was, “Blow-off top.” In that report, I wrote, “In addition, since it is much longer than any prior streak, the odds are that the weekly chart will begin to turn down within the next few weeks.” It began during the following week.
The title of my January 20th weekend update was, “Emini forming blow-off top leading to giving back 2018 gains.” In that report, I said that the Emini would probably pull back 5 – 10%. In addition, I said that it would probably erase all of January’s gains. It did over the past week.
In my February 3 report, I had a section called, “Trump rally beginning 5% correction over Fed fears.” This was based on the big January bull bar on the monthly chart and the consecutive buy climaxes over the prior 4 weeks on the weekly chart. I wrote this based on over 30 years of studying charts for 10 or more hours a day and 10,000 hours of back-testing. I was confident of the math.
In that same report, I had a section titled, “Late Momentum buyers so 5% correction could be fast.” I wrote, “Consequently, their panic selling could result in a very big, fast move down. For example, the Emini could fall 150 points in just a few days.” It fell 200 points on last Friday and this Monday, and the 2 week selloff so far has been more than 300 points.
Bear trend or bear trap?
Compare the DJIA monthly charts of 1929 and 1987 Crashes. They show extremely opposite outcomes. The 1929 Crash formed a double bottom that failed. It was a Spike and Channel bear trend that erased almost 90% of the market’s value. The 1987 Crash formed a micro double bottom that led to a tight bull channel. The bears were trapped into shorts in a selloff that had reversed into a bull trend.
The current selloff is small compared to the initial drop in 1929 and in 1987. However, the shape is similar. Will it be a spike that leads to a bear channel, or will it be a bear trap in a bull trend? Since the monthly chart was in a micro channel for 16 months, the odds of a bear trend without at least a lower high or a double top are only 20%. However, it is too early to know the path back up to the high. The Emini could easily fall another 5- 10% before the bull trend resumes. Yet, the odds are high that this selloff will end up as a pullback in a bull trend on the monthly chart.
Weekly S&P500 Emini futures candlestick chart:
Sharp selloff to the 20 week EMA
The weekly S&P500 Emini futures candlestick chart relieved its extreme buy climax with a strong selloff to the 20 week EMA. Each of the past 65 weeks has a gap between its low and the 20 week EMA. August got to within 2 ticks, but did not touch. This is the longest streak without touching the 20 week EMA in the 100 year history of the stock market.
The consecutive buy climaxes over the past 4 weeks made a correction likely last week. A reasonable minimum goal is TBTL (ten bars, two legs). Hence, traders should expect a trading range lasting 2 – 3 months. This is especially true after the unusually big and fast 2 week selloff.
While the selloff is just a bull flag on the monthly chart, it will probably form a trading range on the weekly chart. A bull flag on the monthly chart means that the trading range on the weekly chart will probably have an upside breakout.
Daily S&P500 Emini futures candlestick chart:
Tradable bottom in 1 – 3 month developing trading range
The daily S&P500 Emini futures candlestick chart fell 10% in two weeks and is Always In Short. This is a bear trend on the daily chart, even though the media generally refers to a 10% selloff as a correction. They reserve the term “bear trend” for a selloff of at least 20%. The selloff will probably lead to be a trading range on the weekly chart and a bull flag on the monthly chart. It ended the longest streak in the history of the stock market without either a 3% or a 5% correction.
There have been two huge legs down, and each had no immediate follow-through selling. These are consecutive sell climaxes. Consecutive sell climaxes typically evolve into a trading range. Once in a trading range, the bulls will create a major trend reversal. Alternatively, there will be a third brief leg down, which would create a wedge bottom.
The Tuesday and Friday bull reversals were extremely strong. In addition, the monthly chart is very bullish. Consequently, there is a 50% chance that Friday will remain the low.
Finally, there is currently a 30% chance that the bull trend will resume next week without first entering a trading range. If so, the reversal up will probably be an Endless Pullback from the 2 week selloff. That means it would be a tight bull channel that looks like a bear flag. Yet, every bear breakout fails within a day or two bars (days). The pullback keeps growing higher. After about 20 bars, there is a 50% chance of a bull break and a measured move up. That would probably result in a new all time high.
Emini tradable bottom in developing 2 to 3 month trading range
Tuesday’s and Friday’s reversals were very strong after big sell climaxes. The monthly chart is in a bull trend. A trading range is likely for 1 – 2 months. Since the odds are against the bull trend resuming and against much lower prices, that leaves traders with a trading range. Friday was a High 2 buy signal (Tuesday was the High 1). It is a reasonable candidate for the end of the 1st leg down.
A trading range has legs up and down. The odds are that next week will be sideways to up and begin a bull leg in the trading range. The 1st target is Wednesday’s high and a 50% retracement, which is about 100 points up. The bears will try for a double top.
The rally will probably go above Wednesday’s high. Yet, this is a trading range. That means that the rally will lead to another leg down. It is too early to know how many legs up and down will form. At a minimum, there will probably be both a double top and a double bottom within a month. That is what typically happens after a strong selloff. Confusion. Which means a trading range with both some kind of double bottom and double top.
Al, no doubt that the vast majority of your students perceive your analysis as valuable lessons for developing Trader’s logics, as a way to master Your (Trader’s) thinking and we highly appreciate what you did for all struggling traders.
I have an interesting question. What should happen on Weekly and Monthly charts that while looking back in 1-2 or more years we could say that Bear trend began in February (March or other month)? In other what would be an ideal scenario for bears on Weekly and Monthly charts?
My usual guide is consecutive big bear bars. The weekly chart has them, but the monthly chart does not. Even that is usually not enough, unless they are exceptionally big. The two on the weekly chart might be. More likely, the best the bears will get on the weekly chart is 2 legs sideways to down because the monthly chart is so strong.
If the monthly chart gets 2 big bear bars, the best the bears will probably get is 2 legs sideways to down. This is because the 16 bar bull micro channel means exceptional strength. The bulls will buy a reversal, even if it is 20%. Furthermore, I mentioned the Buy The Close bulls from January. It was reasonable for them to buy that close.
Reasonable does not mean sensible. The odds favored at least a 5 – 10% pullback at the end of January. It makes more sense to look to buy now, around a 10% pullback. But, it was still reasonable for the monthly bulls because there is an 80% chance that those bulls can scale in and make money or at least a avoid a loss.
For example, they could wait for at least a 3 bar pullback and then start to look to buy more above a strong bull bar. There is an 80% chance that the Emini would not fall much further after that, and then start to work back up to the January close (the final Buy The Close entry). If the selloff is 20%, it might take 20 bars (2 years) to get there. However, that would still only put the monthly chart in a trading range and not a bear trend. The math is very good for the monthly bulls.
The bears need at least a micro double top to have better than a 20% chance of a bear trend. That means they need a rally back to near the high, and then a 2nd reversal down. Consequently, the risk to the monthly bulls is probably less than 20%, and the odds are high that they can make money if they trade this correctly.
I will discuss the monthly chart. 80% of the time, the bears need at least a micro double top. Even then, the reversal would probably be minor (bull flag or trading range). To get a major trend reversal, 80% of the time, they need a Major Trend Reversal (MTR) or a big wedge, which usually is part of a MTR or will lead to a LH MTR.
With 80% of trend reversal tops, there are usually 2 or more consecutive big bear bars closing near their lows early in the reversal. The ideal pattern is an MTR. My 80% rule says that trends resist change. Consequently, even a perfect MTR has only a 40% chance of leading to a bear trend.
The bears need to do a lot before traders see this as a bear trend on the monthly chart. They need some type of double top (every MTR is a type of DT), and a strong reversal down. Remember, the 1st reversal down, no matter how strong, is usually minor. If it is very strong, traders will look for a LH MTR. This means they will still buy the 1st reversal down, no matter how strong it is. Usually, there is not a consensus that a bear trend is underway until it is about half over.
It is important to understand that the yearly chart has been in a bull trend since markets began hundreds of years ago. The biggest pullback in the 100 year history of the major averages has only been a few bars. As long as the world’s population and its productivity continue to increase, the bull trend on the yearly chart will continue. This means for at least another century.
It is both the big picture and the road map. You put in place my brains. Many thanks, Al !
Yeah let’s lighten up to see what unites. I am a single Dad with 3 kids and I want to learn how to execute a few scalps a day. To me that feels like a sensible goal.
Al, with all your experience, how much time would you guess I need to study as an average person to let all the lessons really sink in? In my case it feels like my brain needs its own time to process and store all the insights. But you have probably seen how it works. Thanks
Hi Arnold,
Al has answered this ‘how long’ question many times. You can hear three answers on the Ask Al blog here:
https://brookstradingcourse.com/ask-al/profitable-trading-skills/
https://brookstradingcourse.com/ask-al/how-long-to-get-profitable-following-trading-room/
https://brookstradingcourse.com/ask-al/how-long-before-consistently-profitable/
BTC Admin, thanks for this great reply! Our greatest soccer player over here in Holland, Johan Cruijff, once said in Dutch: “You’ll finally get it once you understand”. I’m pretty sure that applies here too, Al is talking about uncharted territory much like Cruijff liked to. Sometimes it takes months or longer for me to finally understand what Al meant in some paragraph or other. But it’s worth it. All this is going to be great fun. Almost as fun as raising kids. I guess Al is now raising traders!
Al, we are very grateful for all you do to help traders. I think you go to great lengths to explain your analysis, and as you say in your excellent books, we have to be comfortable with uncertainty and low probability events. Never mind the doubters, you called this one, and you have every right to say so.
Hi Al,
Thanks for your dedication to the analysis always. I totally agree with you that emotion is not good for trading.
As you said, we should always be humble and respectful to the market. But as a new trader, I just found myself easily agitated by the market and I lose big money Every time when I am very emotional. I know if I made a bad trade, it must be something wrong with myself. But I can’t control myself sometimes and got disappointed. Could you give some suggestions of how to deal with emotions as a trader, especially in this volatile market?
Thanks.
I think the best thing for most traders is to wait for the bars to get smaller. Bars like these come only every 5 – 10 years, and they last only for a few weeks. Although they are big, they still are reliable. However, the big bars means that stops are too far away for most traders to trade. Traders should not stretch and risk more than their usual 1 – 3% per trade.
Even if a trader is waiting for the bars to get back to normal, I think it is still useful to try to see the patterns, and imagine what a he would do once his account is big enough to trade big bars.
For example, the odds are that the Emini will test Tuesday’s high within a week or two. If instead it falls to a new low, the bulls will buy it for a small wedge bottom, and then the Emini will then rally above Tuesday’s high.
Once there, it will trade down within a few days, and traders will conclude that it is in a trading range. Big Up in January, Big Down in February means Big Confusion. Therefore traders will be unwilling to hold onto positions for more than a few days. The result will likely be a trading range.
I have to agree with Kevin. All through his life my father always told me if you cannot say something nice or complementarity about someone, keep your mouth shut and your ears open. God gave you 2 ears and one mouth for a reason.
I was hesitant to add those references in the post because I am uncomfortable with potentially emotional issues. Emotions are never good in trading. Yet, those references drove home several important points so I decided to include them. I want to apologize for bringing the emotion in. Please read the following to see the points that I think are noteworthy.
There have been some comments over the past several months that made me conclude that I was not as clear as I needed to be with respect to what a reversal would be and how it would appear on different time frames. Traders appeared to believe that I was saying that the stock market was going to enter a bear trend, but they did not appear to think about the time frame. I am going to try to be clear here.
Over the past few months, I tried to be careful to distinguish a pullback from a trend reversal. A pullback means that the bull trend was still intact and therefore higher prices were likely within 20 bars. A trend reversal means that there is now an opposite trend. That means 100 or more bars in the opposite direction. A pullback on one time frame can be a bear trend on another. That is why I always have sections on the daily, weekly, and monthly charts in my weekend blogs.
I repeatedly said that there was only a 20% chance of a trend reversal on the monthly chart without at least a micro double top. That is still true today. I said that while the selloff would be a bull flag on the monthly chart, it might be a trading range on the weekly chart (about 10 bars) and a brief bear trend on the daily chart (1 – 3 months). I still think this is accurate.
I wrote many times that the streaks would end, but that betting on any one top was a losing bet. When discussing the daily chart, I sometimes quoted my 80% rule. It says is that 80% of trend reversals fail. At every possible top, I said that while the odds of the streaks continuing indefinitely were small, the odds were that the current reversal would fail and that the bull trend would continue at least a little higher. I used that at least 10 times in the past few months.
In January, I dramatically changed what I was saying. Instead of saying that the odds favored higher prices, despite any potential top on the daily chart and the extreme buy climaxes on the daily, weekly, and monthly charts, the odds had shifted in favor of an immediate reversal. I said that at least a 5 – 10% correction was likely to begin within a few weeks.
This was because of the consecutive buy climaxes on the weekly chart, and to a lesser extent, the extremely big bar on the monthly chart. That is a very important point. Those buy climaxes were critical and they changed the math. That is what I want traders to realize… the charts had changed. While it is easy to listen to TV and get lulled into complacency, the charts were telling us that something very important was going on.
Furthermore, I tried to make the point that when buy climaxes are unusually extreme, the reversal can be much bigger and faster than what seems likely. I wrote about the momentum bulls who were buying in January for fast money. They would not tolerate anything more than a small loss. Consequently, a reversal could accelerate very quickly. This meant that the selloff could be very big and fast, and the Emini could fall 150 points in 2 days.
Again, I am sorry if I caused any agitation with this weekend’s post. However, I am leaving those references in because they hammer home important points. It’s rare to see a high probability impending reversal. I want traders to gain confidence in their chart reading. When the charts are saying that a big reversal is imminent, even if TV and your friends are saying, “Buy, Buy, Buy,” you should trust their read and not worry about what anyone else is saying.
Thank you very much Mr Brooks.
To the complainers: This post helpfully summarized the stages of analysis preceding a significant event. This is a great (and totally free) learning opportunity. Instead of skim reading the blog and impulsively criticizing what superficially appeared to you as someone bragging about being right, try to make a serious effort to understand what has been written, and you may actually learn something that could make you a lot of money.
It definitely was your comments about the final big bull bar on the weekly TF that prompted me to sell. My wife and I were reading your commentary on Saturday morning, and it struck me that even if the market were to continue to go up, we would leave the final profits to the other traders. Call it intuition influenced by your missive on January 27 that prompted us to conclude that this behavior was just totally unreal. As a small investor riding the bull market with ADI, TXN, and INTC during all of 2017 we were able to bag a $58K profit.
I read your reports critically (and thanks to Dramz’s input I’m glad I’m not alone), always questioning your observations and predictions. In fact, during the weeks of December and January I started to joke to my wife about your repeated comments about climactic moves. But, then on January 27 seeing the best looking bull bar late in this trend I told my wife that this time Al must be right – get the heck out.
So standing on the sideline now, the big question is when to get in again.
Much respect to all of the opinions (DRAMZ, Kevin, Brad, Rein)…
It was by music that the ancient kings gave elegant expression to their joy. By their armies and axes they gave the same to their anger. If I am walking with two other men, each of them will serve as my teacher. I will pick out the good points of the one and imitate them, and the bad points of the other and correct them in myself. The expectations of life depend upon diligence; the mechanic that would perfect his work must first sharpen his tools. Only the wisest and stupidest of men never change. So, never give a sword to a man who can’t dance…
Al is 老师. We are 学生. 道山学海
Let us leave the ‘Trolling’ on face book.
Al, Thank you for providing excellent market analysis. I hope you continue to do so.
Tim
I second Dramz sentiment, although I see it as an all too human trait – we try to amplify our successes. I value plurality of opinions; Kevin, your attack is out of line.
Personally, I acted on Al’s report about the climactic behavior and sold a large portion of my tech stock holdings and made a ton of money. Thank you, Al.
Thanks Al, I follow the blog very consistently and you have been calling for a major correction for the past 4-5 months, yes eventually it happened, but I think pointing out selective recent posts over the past few weeks calling for that correction while similar posts over the past 4 months resulted in nothing is a little pundit-like in my view – as you say, predictions are useless and all that matters is trading what is actually going on based on odds, your insight is very helpful in that, but expressing “vindication” in the “The selloff is technical” section degrades the essence and message of your teachings. The market performance has been consistently against the odds for many consecutive months now, so forgetting what “should” happen and focussing on what is actually happening likely determined who made money over this past period. I think there is very little value in selective “I told you so” type posts, the rest, however, is gold as usual!
Dramz: Why don’t you go study the section of the course on Climaxes again. “Biggest bar late in a bull trend is often a climactic end of the trend.”
Yes Al has has been saying for months that a correction is overdue and inevitable… the market has been overdone for months. But there was never a sign that it was underway.
It was only in the last 2-3 weeks when the January bar started becoming way bigger than all the other months that he started to call it being imminent. And it was over a week ago when he said for the first time it was decisively underway.
He called it!!
So instead of criticising his post. You should reread the posts he quoted from last month, it shows his thinking, and the signals he observed on the Weekly/Monthly to determine the correction was imminent. He’s trying to teach; to share his knowledge and show his thinking leading up to this event. You’d be best served trying to learn from this rather than being critical. Then maybe you will call the next one.
And if you’re not interested in learning like the rest of us, I think you should just keep your mouth shut and show some respect.
Dramz: I couldn’t disagree more.
To me it sounds (strongly) like Al is calling out his prior statements in order to drive home a point for us … that it’s not a matter of *IF* the pullback is coming in a climactic market, it’s only a question of *WHEN*. Without reminding people of what he’s said in past posts, how is he supposed to achieve the reinforcement??
Also, his calling out past statements here when the event in question has finally taken place, is a good queue to people who missed the prior posts (like myself), to go back and read all the context surrounding his statements.
You should try a little of the same humility you claim he’s lacking.
Totally agree Brad. It gives us the opportunity to see the kind of things Al was looking for on the weekly and monthly charts. I went back and read them, and I learned from it. This was my first crash of this magnitude since I started trading. They don’t come along often so Al’s post was a very valuable learning experience for the next one.