Market Overview: Weekend Market Update
The Emini had a strong selloff on Friday, but it is still within its 3 week trading range. While the odds favor a break below the August low and 2800 within a few weeks, until there is a breakout, there is no breakout. There is a 40% chance that Friday was a bear trap and the Emini could reverse up next week.
Bitcoin has been in a triangle for a couple months. That is Breakout Mode. But there are slightly better odds for a break below the 10,000 support and test the bottom of the June rally at 7442.
The EURUSD weekly Forex chart has been in a weak bear channel for a year. This week’s micro double bottom will probably lead to a minor reversal up, like all of the other bottoms over the past year.
Apex of triangle just above 10,000 Big Round Number
Bitcoin had a huge rally for the 1st half of 2019 and has been sideways for 3 months. So far, there is an ii on the monthly chart (not shown). The bulls and most of the TV pundits see the trading range as a bull flag. They want a breakout above the August high and then a test of last year’s all-time high.
But there are problems with this setup. The rally had 3 pushes up, with each leg getting significantly bigger. This is a parabolic wedge buy climax. The bulls were exhausted and took profits in July. It is a mistake to assume they will be quick to buy again.
A reversal from a buy climax typically lasts longer and falls further than what seems reasonable to most traders. The strong bulls will only buy once they are convinced that there is no one left to sell. At the moment, there are many traders ready to sell. Who are they? They are the emotional bulls who have been buying the pullback for the past 2 months, afraid that the bull trend will soon resume without them.
10,000 is probably fake support
Bitcoin broke strongly above 10,000 in June. It is a Big Round Number and traders are hoping it will be support.
But there is a problem. Traders have been easily able to buy pullbacks to below 10,000 for over a month. Traders should realize that a good fill is usually a bad trade.
All markets are mostly made up of institutions. If you take any trade, you should assume that an institution is taking the opposite side.
Furthermore, it is useful to assume that we are dumb and they are smart. If it is very easy to do something, then an institution is eager to do the opposite.
Traders have found it easy to buy at 10,000. That means many institutions are eager to sell there. Why? Because they think that Bitcoin will go lower and they can make money.
Unless the bulls get a strong reversal up from 10,000 within the next few weeks, Bitcoin will probably break below. All of those bulls who thought it was support will sell out of their longs in a panic. The result will be a quick move down to the next support, which is 7442.
What happens if the weak bulls exit?
If the rally continues to fail to materialize, at some point the weak bulls will begin to think that they bought too early and too high. If they come to that conclusion, they will exit their longs in a panic. That would result in a break below the 3 month trading range.
When there is a reversal down from a parabolic wedge buy climax, the selloff usually retraces to the bottom of the final leg up. That is the June 4 low of 7442, and it is a reasonable target. Less likely, the selloff will continue down to the bottom of the pullback after the 1st leg up. That is the April 4 low of 4784.
But if Bitcoin truly is in a bull trend, the 2 week rally will be the start of a series of many bull bars on the daily chart, like in early June. Show me the money. I think lower first, then higher.
EURUSD weekly Forex chart:
High 2 minor bottom in yearlong bear channel
The EURUSD weekly Forex chart has been drifting down for a year since its strong reversal down in May 2018. There have been many credible bottom attempts, but each failed within a few weeks.
However, the bears are failing to get a strong break below the bear channel. The bears have been taking profits at each new low. This means that they are not confident of much lower prices. Also, the bulls continue to buy below the last low, knowing that this has been a profitable trade for a year.
A bear channel is a bull flag
There is no evidence that this is about to change. But there are a couple things that traders should know. If the bears get a strong break below the bear channel, there is a 75% chance that it will fail and reverse up within 5 bars (weeks). If that were to happen, it would likely represent a transition from a bear channel into either a trading range or a bull trend.
Also, even if there is no climactic reversal up from below the bear channel, traders should ultimately expect a bull breakout. There is a 75% chance that a bear channel will eventually have a bull breakout. It would then evolve into either a trading range or a bull trend. There is only a 25% chance of a successful bear break below a bear channel and then a transition into a stronger bear trend.
However, channels can last a long time. There is no evidence that this one is about to end. Traders will continue to buy new lows and sell rallies, expecting legs up and down to last at least a few weeks.
Monthly S&P500 Emini futures chart:
Sideways to up for at least another month
The monthly S&P500 Emini futures chart has a bear bar so far this month. But nothing has changed on the monthly chart from what I have been saying since early July. There were consecutive outside bars in May and June. July triggered an oo buy signal when it went above the June high. At that point, there was a 60% chance that the monthly chart would be sideways to up for at least 3 months.
While August retraced more than half of July, it is still a 2nd sideways to up month. This should continue at least into September.
August might become High 1 bull flag buy signal bar
If the August high remains below the July high, August will be a High 1 bull flag buy signal bar for September. But unless it has a bull body, which is unlikely at the moment, it would be a weak B setup.
Also, the Emini is at the top of a 20 month trading range. Most trading range breakouts do not go far. Therefore, the likely reward for a bull buying with a stop above the August high is not very big.
Big risk and limited reward means that the risk/reward is not strong for a stop entry buy above the August high. In addition, since most trading range breakouts fail, the probability of a strong rally is small. When the risk/reward is bad and the probability is low, there might be more traders selling above the August high than buying. If so, the rally might only last a bar or two before there is another 1 – 3 month reversal down.
Weekly S&P500 Emini futures chart:
Big bear inside sell signal bar after 2 doji bars
After the early August plunge, the weekly S&P500 Emini futures chart has been sideways for 3 weeks. This week formed a big bear inside bar and it closed near its low. It is therefore a sell signal bar for next week. The bears want a strong break below this week’s low. That would represent a resumption of the August selloff.
But a big inside bar in a tight trading range has a lower probability of success for the bears. The big bar means big risk. Fewer bears will sell at the bottom of a 3 week tight trading range.
Also, there is a conspicuous tail on the bottom of this week’s bar. That further reduces the probability of a successful bear breakout.
Weak sell signal bar
Traders should always look to the left and not just at the sell signal bar. The context is important. A 3 week tight trading range is a weak environment for a breakout. Markets have inertia. That means they tend to continue to do what they have been doing. The weekly chart has been going sideways of 3 weeks.
Why were the bears unable to create a better sell signal bar, like a small bear bar at the top of the 3 week range? Traders should assume that it is because the bears were not strong enough to create a more convincing sell signal.
Next week is important. A big bear entry bar would make a test of the June low likely.
But if the bulls can prevent next week from falling below this week’s low, they might be able to create a 2nd consecutive inside bar. Or, if the bears trigger their sell signal but next week closes near its high, the sell signal will likely fail during the following week. Either outcome would return the weekly chart to more neutral.
Daily S&P500 Emini futures chart:
Reversal down from double top bear flag, but still in 3 week trading range
Traders know that the August selloff was surprisingly strong. When there is a strong selloff, traders expect at least a small 2nd leg sideways to down. The bulls hope that the August 15 double bottom satisfied that expectation. But Friday’s selloff means that the bears have a 60% chance of a break below the August low.
When a selloff is as strong the August one was, the 2nd leg typically forms a new low and not just a test of the 1st low. Therefore, traders should expect one more push down to below 2800 before there is a new all-time high.
But, a couple big bull bars closing on their highs and above the 3 week trading range would shift the probability in favor of a new high without another leg down.
The bulls have a 40% chance that Friday’s selloff was a bear trap. It might be a brief, sharp pull from the August 5/August 15 double bottom (a double bottom pullback). If they get a strong reversal up early next week, the odds will shift in their favor.
At the moment, nothing has changed from what I have been saying all month. The Emini will probably fall below the August low and 2,800 at a minimum within a few weeks. There is a 50% chance that it break below the June low. Finally, the bears have a 40% chance of a 120 point measured move down based on the height of the 3 week trading range.
But don’t forget the monthly chart. Any selloff should end within a couple months. The odds still favor a new all-time high this year.
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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 Intraday Market Update page.
Al, Same subject as Joshua — the point about a small bear bar (with little/no wick or reversal bar form, I’ll add) at the top of range being a strong sell bar seems std price action (per what you teach), but the phrase “bears were not strong enough to create a more convincing sell signal” suggests to me you are implying a planned, deliberate, classic bear accumulation/distribution operation, which had it been successful this past week, would have produced that strong, small sell signal bar — is that correct ?
If the bears want lower prices, they have to have the ability to create price action that will make traders believe the market is going down. This past week was more consistent with a bear leg in a trading range than with the start of a bear trend.
If this week went above last week’s high, closed on its low but in the top 3rd of the 3 week range, traders would be more worried about a selloff in the coming week.
If this week was huge and closed on its low and far below the 3 week range, it would be a Bear Major Surprise. Traders would expect at least a small 2nd leg down.
The bears failed to do something this week to make traders worry about a big selloff next week. If the bears were strong, they would have been able to instill fear. They failed. Next week could still sell off, but it is less likely.
Bigger bars are usually “better” except when they create bad risk/reward situations like closing near the edge of a trading range. If the bears were really strong then they would have caused the bar to close far below the trading range in a breakout rather than at the bottom.
When you say the bears were too weak to create a better S&P weekly sell signal bar like a small bear bar at the top of the 3 week range, does that mean that a much larger sell signal bar, albeit closing at the bottom of a trading range, is weaker than a small one? I personally would be much happier to short below a small sell signal bar at the top of the range, so I agree that that is better, but when I read “because the bears were not strong enough to create a more convincing sell signal” it’s a bit confusing for me. I see a bar that’s 2-3x bigger closing kind of near the low as “stronger” than a small bar at the top of a range. Would the bears have been stronger by holding the prices on Friday where it had been Monday-Thursday rather than selling all day?