Video duration 28min 09sec.
Al Brooks presents the first of six in-depth market analysis videos for the S&P500 Emini. Video reports to follow for Bond futures, EURUSD Forex, Crude Oil, Gold futures and Bitcoin.
Hi, everyone. I’m Al Brooks. Thank you so much for your attention. At the end of every day, I look at charts to try to get an idea about what to expect for tomorrow. I do the same at the end of the week, the end of the month, and now at the end of the year. This is the New Year’s Day weekend, and I made a series of charts to create videos to give my thoughts about what to expect for major markets in 2021. I made six different videos – Emini, the bond market, the Euro versus the dollar Forex market, gold, crude oil, and Bitcoin.
Now, I want to add a disclaimer up front: with every additional tick that we see, the outlook changes. I’m giving you my perspective as of right now, the start of 2021. I hope that you find the information useful.
S&P500 market outlook for 2021
In this video, I’m going to talk about the S&P 500 and the Emini. I also have a yearly chart. I’m going to look at some monthly charts as well.
This is a yearly chart of the cash index going all the way back to 1960. Big rally, Trading Range for 10 years, and now another big rally. Each bar is 1 year, and this is 2020, and it’s a huge bar. It traded above the 2019 high, below the 2019 low, so we were Outside Down, and now we’re back above the 2019 high. So 2020 is a huge Outside Up bar. It was Outside Down and now it’s Outside Up, and it closed on its high.
This is an important point. When you look at a chart, 95% of the bars on the chart are never more than 60% certain of anything. They’re also not less than 40% certain of anything. That means that the probability of anything is between 40% and 60% during 95% of the bars on the chart. During 5% of the bars on the chart, the probability is 70% that the market will do something.
Here, we’re starting to accelerate up early in a bull trend, and once you have a pair of consecutive big bull bars closing on their highs early in a bull trend, the probability is high that we’re going to go at least a little bit higher. This is a 70% bet that we’re going up at least a little bit. Obviously, we went up a lot. But at the close of this second bar, the probability was 70% that we would go up at least a little bit more.
I bring that up because when you see this huge bull bar, you might assume that there’s a 70% chance of the market going a lot higher, and that’s not true. This is one of those 95% of the bars where the probability is between 40% and 60%. This is not clearly going to lead to a strong bull trend. It might, but it’s not clear. The probability is no greater than 60%; it’s no less than 40%. May go up a little, may go down a little, but this is not a 70% bet that we’re going significantly higher. This is basically an ordinary bar as far as probability goes. In terms of appearance, it’s extraordinary. It’s a huge Outside Up bar closing on its high. In terms of probability, what it’s forecasting, it’s not a high probability bet.
Again, a huge Outside Up bar closing on the high. Very strong bulls, and breaking above a Parabolic Wedge. We tried to get a Parabolic Wedge here. Three legs up – one, two, pause, three. We reversed down, and then we reversed up again. The top of the Parabolic Wedge is here, and now we’re breaking above the Parabolic Wedge Top. So very, very strong bulls. Very aggressive bulls.
But the biggest bull bar late in a bull trend usually attracts profit-takers. It usually is an exhaustive Buy Climax, and therefore it’s reasonable to expect some profit-taking within a couple bars. Every bar is one year, so a couple of bars is within a couple years. And it probably is going to lead to a Trading Range for about 10 years, like this. This does not look like much, but it’s 10 years of sideways trading, and we’re probably going to get 10 years of sideways trading up here, starting fairly soon.
Exhaustion Gap became Measuring Gap
This is from my Encyclopedia of Chart Patterns. I have about 2,000 patterns classified in ways to demonstrate certain things.
What do you notice with this bull trend? Very few pullbacks, and when there are pullbacks, they’re small or they’re sideways. It’s a very strong bull trend, and when a trend looks like that, you do not sell. Even though a bar might look like it could be big enough to cause exhaustion – here, here, here, or here – when the market’s in a Small Pullback Bull Trend like this, it’s usually very difficult to make any money selling. So it’s better only to continue to buy until the market transitions into something else, like a weaker trend or a Trading Range.
Very big bull trend bars. Small Pullback Bull Trend. You have a Buy Climax up here, but now we have a possible final bull flag, a Trading Range late in a Buy Climax.
Here, it was reasonable to expect a possible top, a Buy Climax, and a second Buy Climax. We tried to reverse down. Unable, and then we broke out even stronger. When that’s the case, instead of looking at these as possible Exhaustion Gap bars, I think of them as possible Measuring Gaps. The bears tried to get a top here – two legs up, two consecutive Buy Climaxes. Instead of reversing down, we had an even bigger Buy Climax. That’s usually going to lead to a Measuring Gap instead of an Exhaustion Gap. You take a Measured Move from the start to where the top could have been and you project up, and the market usually will find profit-takers at that price. You can see almost exactly at that price, the market stalled. The market raced up there, bulls bought knowing it should get there, and once it got there, the bulls took profits.
Consecutive Exhaustion Gaps
Again, this is another example from my Encyclopedia of Chart Patterns.
Here we had a pair of bull bars, the best-looking bull bars in the entire bull trend. Then we had a pause, smaller bull bar, and then a bigger bull bar. This was occurring in the most extreme Buy Climax in the history of the stock market. This is the monthly chart, and it was the most extreme Buy Climax in the history of the monthly chart, the weekly chart, and the daily chart. The odds were, we were going to get a pullback. Back here, I wrote on my daily blog that we may go up a little bit more, but we’ll probably soon correct 5% to 10%, and within a couple weeks, we fell 10%. Because that’s what the market normally does. Exhaustive Buy Climax.
When you have the best pair of bull bars late in a bull trend like this, 60% of the time you’re going to get one more push up, but 60% of the time either this is going to lead to a couple legs sideways to down, or they’ll begin after one more brief push up, 1 or 2 bars. We got a couple legs sideways here.
Second consecutive Buy Climax. Blow-off top. But even though it’s a Buy Climax, an exhaustive rally, and we had a pretty significant selloff, the bulls who bought that close never had a chance to get out after they saw this disappointing bar, this bear bar. When that’s the case, the market will normally come back up here. The Buy The Close bulls, the bulls who bought that close, will buy more after a couple legs down above a bull bar, betting that the market will get back there. And it did. Once it gets there, the bulls who bought here get out breakeven. If they bought more here, they get out with a profit here. So you have bulls selling at that prior extreme Buy Climax, and the result in this case was a Higher High – you can call it a Higher High Double Top, Higher High Major Trend Reversal – and then we got a bigger selloff.
When you have these extreme Buy Climaxes, the market normally corrects down at least to the bottom of the most recent Buy Climax. So we have a Buy Climax here, this pair of Buy Climaxes. We tested that. But this entire rally from here up was a Buy Climax, and the selloff down here was a test of that Buy Climax low. Once it gets there, the bears buy back shorts and bulls start to buy again.
DOW monthly chart
This is the DOW chart, monthly chart going back 100 years. This is the 1929 stock market crash. The market lost 89%. But what has the market done since then? It’s been in a bull trend, a huge bull trend. However, what might not be so obvious is that there were some big corrections along the way. Here’s the 1987 crash. The market lost about 25% in one day. One day, down 25%. At the time, it looked like the end of the world. I started trading the month before the crash, and it was really scary. But now when you look at it, you don’t even notice it. It doesn’t look any different from any of the other, many big corrections that we’ve had.
2009, the market was down 58%. It does not look like 58%, but that is actually a 58% correction. This correction in here was also big. I think it was almost a 60% correction.
Very strong rally. 15-year Trading Range. Trading Ranges tend to have new highs and new lows. This is a new high in the Trading Range; this is a new low. But it still stayed sideways for 15 years.
Here, we were sideways for about 10 years. Sideways here. We had a new high, we had a new low. But basically within a range for about 10 years. Again, the point is sometimes when the market’s in a Trading Range, you get a new high instead of a resumption of the bull trend.
I bring that up because look at what we’re doing here. This might be a Trading Range. If it’s a Trading Range, then the very strong rally that we got from the March low, breaking to a new all-time high, could be just a new high in a Trading Range, like this high broke above that range, and this high broke above that range. Even though everybody on television is extremely bullish, look at what has taken place in the past. It’s entirely possible that this is a Trading Range and that it could last 10 years. This one lasted 10 years, this one lasted 15 years. This could last 10 years as well.
The bulls are hoping that this is a resumption of the bull trend. They’re hoping that it’s this and not this. They’re hoping that it’s this and not this, breaking out above the top of the range but staying in the range. And we don’t know. Right now we don’t know. We need more information. Is this just a new high in a Trading Range, or is it a new bull trend?
My personal feeling is we’re still in a Trading Range – that this is probably like this. This went pretty far above that, but when you look at the chart, I would call this whole thing a Trading Range. I think that even if we go up here, it’ll come back down to this low, the March crash low, at some point in the next several years.
S&P500 Emini monthly chart
Here’s the monthly chart of the Emini. We had a huge bull bar in November and a very good bull follow-through bar in December. Consecutive bull bars breaking out like that, usually you’re going to get higher prices. At least slightly higher prices at a minimum in January. But there’s something else going on here. We have a High 1 bull flag. We have a pullback, and it was a buy signal when it went above this bear bar, the November high. But when you have a pair of bear bars for your bull flag and you’re late in a bull trend, the market normally does not go up very far. Normally it goes up a couple bars, maybe a little bit more, and then has more of a pullback. So even though this is extremely bullish, this bear flag is bad for the bulls.
And then there’s something else. If you draw a line across the top of the pattern – we can see that we had a bull channel if I draw that line. I can use this green line, the bull trend line, create a parallel, anchor it to this high, and we’re breaking out above that. And then this Expanding Triangle. There’s a little blue line that begins here, and we’re breaking out above that. So there are three different ways to draw this, and we’re breaking out above the bull channel on all three ways to draw the pattern.
Bull breakouts of bull channels typically fail within about 5 bars. 5 bars on a monthly chart is 5 months. However, the odds are we’re going to get a reversal down within 5 months.
Breaking above monthly bull channel (1995)
Take a look at this. This is another example from my Encyclopedia. This is the 1987 crash. After the crash, we rallied. You can call it a Wedge; you can call it a bull channel. In any case, we were sideways here, and we’re starting to break out above that high. Remember, most attempts to break out above a bull channel fail, but sometimes they succeed. 25% of the time, they lead to a new bull trend. Here, in 1994, early 1995, we’re starting to break out above the prior high. We’re still in the channel. I don’t have the channel line drawn, but we’re breaking out above the prior high.
Consecutive bull bars closing on their highs. Chances are we’re going to go at least a little higher, at least another bar or two up. We could go a lot higher, but at least a little bit higher.
Now, this is where we were, and now we’re here. Now we have 6 consecutive bull bars closing on their highs, and now the market’s breaking above the bull channel. Remember, most breakouts above bull channels fail, so chances are this is not going to go a lot higher. It’s strong enough to expect at least a small second leg up after the first pullback, but only 25% of the time will this be the start of an even stronger bull trend.
6 consecutive bull bars closing on their highs. Strong breakout. Expect at least a small second leg up. Bulls will buy the first pullback. Only 25% chance this is the start of an even stronger bull trend, a breakout.
Well, guess what? This is that same chart, and this is where we were. This is what followed. This is that 25% of the time when you break above a bull channel, you accelerate up and form an even stronger bull trend.
Here are those 6 bull bars, and at the time they looked big. But look what followed. The market went up manifold after those 6 bull bars. It went up an incredible bull trend. The bulls are hoping that what’s going on now with the stock market is this – that we’re in the early phases of an extremely strong bull trend. The bulls have a 25% chance of getting that, 75% chance of not.
Here, we were up about 300% over the course of 6 years or so. But extreme Buy Climaxes tend to have extreme corrections, and therefore you have to assume we’re going to go sideways to down for at least 10 bars, maybe 5 or 10 bars. At least. And we might correct 50%. Well, in fact, we did sell off 50%. This low is 50%, a 50% correction of this rally. Several legs down to a Wedge, a Double Bottom pullback, and then a leg up. What followed was a 10-year Trading Range. We went down, we went up, we went down, and then up again.
But the point is, a breakout above a bull channel can go a lot higher than just 4, 5, 6 bars. It can lead to a huge bull trend. The second point is, when you have an extreme rally, you tend to have a very big correction, and it tends to last a lot of bars. Here we got a 50% correction and a Trading Range for about 10 years.
Will breakout lead to huge bull trend?
Back to where we are on the monthly chart. Is this the same as 1995? Are we going to get a series of 6 bull trend bars and then 20 or 30 and go much higher, three times higher over the next 6 years? Or is this going to be like most attempts to break out above a bull channel? Will it go up a few bars, maybe 5 bars or so, and then get a couple legs down? Not necessarily a bear trend, but at least a couple legs down, maybe to this low, possibly to the bottom of the channel.
As long as the Emini keeps going up and it keeps forming bull bars closing on their highs, traders are going to continue to buy. But if it starts to reverse, the bulls will be very quick to exit. As I said, this could be the top of a Trading Range. Here’s the Trading Range, an Expanding Triangle, and we could be getting a failed breakout above that top and then a reversal back into the Trading Range. We don’t know yet. We need more information. At the moment it’s very bullish, and it looks like we’ll go at least a little bit higher, but it still could be like that example that I showed you a while ago where the market broke out above the top of a Trading Range and then worked its way all the way back down to the bottom of the range.
Again, couple big bull bars closing on their highs like that, we should go at least a little higher – but not necessarily a lot higher. Remember, there’s a 70% chance that we’ll get a reversal down within about 5 bars, and the reversal probably will have at least 10 bars and two legs. At least down to here, possibly down here.
S&P500 Emini weekly chart
I want to talk a little bit about the weekly and daily charts. This is the weekly chart. We’re in a bull channel. Right now we have three pushes up – one, two, and three. The bulls hope for a bull breakout up to the top of the channel, and the bears hope that we reverse down at least to the bottom of this little Wedge. First push, pause, second push, pause, third push, and bears want a reversal down here, which would be at the bottom of the channel. That’s around 3500.
Small Pullback Bull Trend. Even this pullback is not all that big. This is only 2 bars. This is the weekly chart. A Small Pullback Bull Trend can go a lot higher. We have a small Wedge. Typically a small Wedge is not going to lead to a big reversal. It leads to a minor reversal, maybe down to here, maybe to test the breakout point here.
S&P500 Emini daily chart
Daily chart, same thing. Very strong rally. I would call it a spike up, and then we had a pullback, and then we entered a channel phase. We’ve had several legs up, maybe a Wedge. Bulls are trying to break above the channel. The bears want the market to reverse down to the start of the channel, down here. This is the target, around 3500. We do not have a clear reversal down yet, as of the end of the year.
A breakout is a strong trend. The trend tends to weaken into a channel. So it’s a spike up, a breakout, Spike and Channel bull trend, and 75% of the time you get a break below the channel and a test down to where the channel started, and then a Trading Range. 70%, 75%.
Strong Spike and Channel Bull
This is again from the Encyclopedia. There’s a strong breakout and then a very Tight Channel. A bigger bar, maybe a climax, and we have a bear reversal bar. Spike and Channel bull trend, but a very Tight Bull Channel. That’s a very strong bull trend. If we get a reversal, it’s probably not going to come all the way down here or here. The reversal might be more sideways. Small Pullback Bull Trend usually does not become a bear trend without first transitioning into a Trading Range.
Here we got two legs down. My minimum goal is two legs and 10 bars, and it can be sideways or down. Here, mostly sideways after a very strong bull channel.
This is a much weaker bull channel. Many more, bigger bear bars. So we have a spike up, a pullback, and then a channel. If we get a reversal here, there’s a better chance of it coming down to these lows where the channel began.
Spike and Channel bull trend, and we got a reversal down to the neighborhood of the pullback after the spike and then a transition, usually, into a Trading Range. We don’t know which of the two possibilities will happen with the Emini now. Is it strong, like the first one, and we correct sideways? Or is it weaker, like this one, and we correct down?
Back to the daily chart. So which is it/ we have a lot of bear bars, but not quite as many as in the chart that I just showed. However, this channel is not nearly as strong as the other chart, where the market was in a very Tight Bull Channel and the correction went sideways. So we’re probably going down at least a little. We may come down here. That’s my target. That’s where I think we’re headed. But we’re not necessarily finished going up.
2020 close gap up on daily, weekly, and yearly charts
I want to say one other thing about this. This is not 2020. This is the first bar of 2021, and it’s a very big bear bar reversing down from the top of the channel. If you notice, the open of this bar is above the close of that bar. That is the last trading day of 2020, and we gapped up. Not only did we gap up on the daily chart, we gapped up on the weekly chart, monthly chart, and yearly chart. In the first few minutes of the year, we immediately closed the gap. In the first few minutes of the year, we fell below the high of last year. This bar is the high of last week, the high of last month, and the high of last year. We gapped above all of it and immediately reversed down.
When the market went above the high of last year – remember, last year was a big Outside Up bar on the yearly chart – when we went above the high of that Outside Up bar, we triggered a buy signal on the yearly chart. But it immediately reversed down. This is the daily chart. When we went above last year’s high, we immediately reversed down. By triggering a higher timeframe buy – the yearly chart – sometimes the market immediately reverses down very steeply like this. We triggered a yearly buy signal by going above the big Outside Up bar and immediately sold off. The bears are hoping that it’s the start of a bear trend.
But very often, maybe half the time, when you trigger a higher timeframe buy signal and you immediately reverse, the market will go back up and test the entry price. It’ll trigger the buy signal again. You can see the second trading day of the year, January 5th – this is the first trading day of the year, January 4th; second one January 5th – we have an inside bar after an outside bar. So we have an ioi, a buy signal. This could lead to a breakout back above last year’s high.
If we do get up there, the bulls hope that we just keep going up. The bears hope that if we go above last year’s high again, they’ll want it to reverse down again and begin the move down here. At the moment, I think we’re going down here. What I don’t know is if we go up a little bit higher and then down here or if the move down has begun right here. With this bull ioi and with the yearly buy signal triggering, I think there’s a 50/50 chance we’re going back above last year’s high, whether or not we’re going to come down here.
So I’m expecting a reversal down. Maybe we go up a little bit more and then reverse down. 25% chance we break to the upside and we just accelerate up. 70%, 75% chance this channel is going to have a bear breakout below the bull trend line and test down, usually to around the start of the channel.
And that’s my take on what to look forward to in 2021. Again, every tick that we get changes the probabilities. It changes the outlook. But as the Emini is right now on the daily chart, a Spike and Channel bull trend, we should get a reversal down. We have not necessarily finished going up yet.
And the most fascinating thing is the gap up on the yearly chart. The yearly chart has a huge Outside Up bar. The best-looking bull bar late in a bull trend – in this case, the yearly chart – usually is exhaustive. The market might go up another bar or two, a year or two, but it’s usually going to lead to a bigger correction. My general rule is 5 to 10 bars, two legs down, and 5 to 10 bars on the yearly chart is 5 to 10 years. Therefore, even though the market is very bullish right now, I think it’s not going to stay bullish much longer. A year or two if the bulls are lucky.
Again, I’m Al Brooks. Thank you so much for your attention. I hope that you found some of this information useful. I want to wish you the best for the coming year as a trader, and I also want to wish you and your family a very wonderful 2021.