Monthly S&P500 Emini futures candlestick chart: Breakout above 2 month bull flag
The monthly S&P500 Emini futures candlestick chart is forming a strong entry bar above last month’s weak buy signal bar. The 1st pullback to the moving average in 20 or more bars usually finds buyers. Last month was a weak buy signal bar and was more likely to find sellers above its high. The odds favored more sideways trading. So far, there has been strong buying, but there are still 5 days left until the candle closes. It might look much less bullish next week, although there is no indication of that yet. The next target for the bulls is the all-time high. It is too early to know whether the October rally is a resumption of the bull trend or simply a bull leg in a yearlong trading range. Those who trade the markets for a living will watch to see if the Emini goes sideways for the next few months or breaks strongly to a new high.
Weekly S&P500 Emini futures candlestick chart: Strong follow-through buying
The weekly S&P500 Emini futures candlestick chart had a smaller bull body last week, which is a sign of a loss of momentum. It had a big bull body this week and is continuing its bull breakout above the September bear flag. The next targets are the top of the August bear breakout and then the all-time high. Since it is now back in the 7 month trading range, it might begin to go sideways again with a couple of weeks. The 4 week rally is so strong that the 1st attempt to reverse down will probably be bought. The best the bears can reasonably hope to get over the next couple of weeks is a pullback in a bull breakout.
Daily S&P500 Emini futures candlestick chart: Those who trade the markets for a living see buy climaxes
The bulls see the tremendous momentum of the past 4 weeks, and are hoping for the rally to break out to a new all-time high within the next couple of week’s. However, the daily S&P500 Emini futures candlestick chart has had 4 consecutive buy climaxes, it is far above its moving average, it is testing the top of an expanding triangle, and it is back in the 7 month trading range. These factors make a sideways to down pullback likely within the next week or so. Because yesterday’s bull breakout was so strong, the first reversal attempt will probably be bought, and the bears will probably need at least a small double top before traders will willing to bet on a test back down. The target for the bears is the bottom of the most recent buy climax, which is yesterday’s low.
Why does a series of buy climaxes mean that a pullback is likely when it is a sign that the bulls are very strong? Traders need to contain risk. The stop for the bulls is below the bottom of the rally, which is far away. It does not matter if a bull bought the low 4 weeks ago or if he bought today’s close. The stop is the same and has nothing to do with the entry price. Since the risk is big, traders have to do something to reduce the risk. They can buy puts or put on hedges, but the easiest way to reduce risk is to reduce the position size. When bulls reduce their position size, they are taking partial profits. This means that the bulls are selling. The bears are always selling. If bull begin to sell as well, the Emini will pull back. Once it pulls back to support, like yesterday’s low or the 20 day EMA, especially if the pullback has 2 or more weak legs and lasts at least 10 days, bulls will probably be eager to buy again. If the rally resumes, they put their stop at the bottom of the pullback instead of at the bottom of the bull trend. With the smaller risk, they can again hold a full position
Even if the bears get a reversal lasting 5 – 10 bars or get a gap down next week and create an island top, the momentum for the bulls has been so strong that the best the bears can reasonably hope to get is a trading range. Bears will probably be quick to take profits and bulls will be eager to buy at a better price. This makes a swing down unlikely, despite all of the factors that I mentioned in the first sentence.