Monthly S&P500 Emini futures candlestick chart:
October selloff more likely leg in trading range than start of bear trend
The monthly S&P500 Emini futures candlestick chart is still in a bull trend. It is now touching the 20 month EMA for the 1st time in more than 20 months. This is therefore a 20 Gap Bar buy setup. However, the bear bar is so big that the chart might have to go sideways for a few months before the bulls will be confident of support.
At the end of last year, I repeatedly wrote that the monthly, weekly, and daily charts were the most overbought in the 100 year history of the stock market. I further said that the trend was therefore unsustainable and it was likely to end soon.
A bull trend usually does not become a bear trend without first entering a trading range. I therefore wrote that the Emini would probably enter a trading range that would last 1 – 2 years, like in 2014 – 2016. So far, what has unfolded in 2018 is consistent with all of the above.
Double top, but minor reversal likely
The bears are hoping that the January-September double top will lead to a measured move down below the February low and create a bear trend. That would be unusual. This is because the double top only has 9 bars and the bull trend has lasted about 100 bars on the monthly chart. In addition, the bull trend has been in a tight bull channel. This small of a top is unlikely to be enough to turn a bull trend into a bear trend. A trading range is therefore more likely.
In fact, as strong as the October selling has been, the monthly chart has this week barely pulled back to the 20 month EMA. Since it has been above that average for a long time, the bulls have been willing to pay an above average price. Many will be eager to buy at the average price, especially if there is not strong follow-through selling in November.
Last year’s buy climax likely to lead to trading range, not bear trend
In February, I said that there would probably only be 1 – 3 month pullback and then a rally to a new high. I wrote that the new high typically lasts only 1 – 3 months before there is another reversal down. Finally, I wrote that at that point, the market usually forms a trading range. This is what is happening now.
October is a surprisingly big bear bar. Surprise Bars typically have at least a small 2nd leg down. As a result, even if there is a reversal up next month, it will probably only last for 1 – 2 months. Traders will sell the rally and the Emini will likely have to test the October low 2 or 3 months from now.
If it reverses up at that point, there will be a micro double bottom in addition to a double bottom with the February low. Then, the bulls would have a reasonable chance to reach the measured move target at around 3200, based on the 300 point tall yearlong trading range.
Weekly S&P500 Emini futures candlestick chart:
2nd leg down after early October selloff
The weekly S&P500 Emini futures candlestick chart sold off again this week. Since last week was a bull doji inside bar, it was a weak sell signal bar. That means that a protracted selloff was not likely.
Although this week fell for a lot of points, it closed well above the low of the week. That reduces the chance of a big move down from here, and it increases the chance of a rally next week.
Furthermore, after the big bear bar 2 weeks ago, last week was a doji. That is bad follow-through. It increases the chance of bad follow-through for the bears next week as well. This makes sideways to up likely next week.
The current selloff has a 50% chance of a break below the February low. In addition, there is a 40% chance of a 300 point measured move down below the February low, based on the height of the yearlong trading range.
However, the yearlong trading range will probably continue for many weeks before there is a breakout of the range. Trading ranges resist breaking out and they last longer than what seems reasonable.
Daily S&P500 Emini futures candlestick chart:
October sell climax finding support at 2017 close
The daily S&P500 Emini futures candlestick chart is back to last year’s close. Since it oscillated around that price for the 1st half of the year and it is now back there, the price is still important. The Emini might trade around it again for a couple of weeks before deciding whether to test the February low or the September high.
With the election in 2 weeks, there is an increased chance of a sideways market until then. This is especially true after 2 climactic selloffs down to support.
Bear micro channel sell climax
Every bar for the past 7 days had a high below the high of the prior day. This is an 8 bar bear micro channel. Look at the daily chart and see how often there is an 8 bar micro channel up or down. It is rare. Therefore it is unsustainable and a sell climax. Consequently, it will probably end on Monday or Tuesday. That means that traders will expect Monday to rally above Friday’s high or Tuesday to rally above Monday’s high.
An 8 bar bear micro channel is a sell climax, but it is also a sign of strong bears. Consequently, the 1st reversal up in minor. Therefore the Emini will probably only rally for 1 – 3 days before there is a pullback below the low of the prior day.
There is a wedge bottom on the daily chart using the October 11, 24, and 26 lows. That increases the chance of a couple legs sideways to up. Also, October 26 to November 6 is seasonally bullish. In addition, the Emini oscillated around last year’s close repeatedly for the 1st half of the year. Finally, big selloffs in October often lead to rallies for the rest of the year. All of these factors reduce the downside risk over the next couple of weeks.
It is important to note that the early October selloff was strong enough to have a 3rd leg down. Therefore, traders will look to sell a rally next week if it looks weak. If there is then a new low and a reversal up, there would be a bigger wedge bottom. The October 11 and 26 lows would be the 1st 2 legs down.
Wedge bottoms contain sell climaxes, which exhaust the bears. They begin to take profits and then wait for a couple legs up before selling again. The bulls know this and they buy. The result is that the wedge bear channel reverses up and typically evolves into a trading range. That is what is likely over the next month.
Couple of thoughts I wanted to get your opinion on.
On the monthly chart, you mention a trading range to be more likely vs a bear trend. However, looking at the bull trend that started in 2009, we sold off after what looks like an exhaustive move thru Jan of this year and broke below the bull microchannel and went back up as the first breakout of the micro channel failed. We however have 3 pushes up on the monthly and we broke above it and reversed in Jan. Now we have October as a big bear bar erasing all all the gains since may. Is this not a 2 bar reversal and a second entry short for TBTL. If we get a break below Oct in November with a bear entry bar, we could get back all the way to the top of the 2015 – 2016 trading range without testing the high at all.
I agree with all of that, but the top has only a 40% chance of successfully leading to a bear trend on the monthly chart without 1st transitioning into a trading range for at least 15 bars (months). Bull trends typically do not reverse into bear trends without a trading range.
This range has lasted 9 months. It is more likely a bull flag, even if the selloff continues below the February low, falls 20 – 30% (the news says that a 20% pullback is a bear trend), and lasts several months. It will still more likely be a pullback in a strong monthly bull trend than a bear trend. This is especially true after such an incredibly strong bull trend. The bulls are exhausted after the most extreme buy climax in history. But, the buy climax is also a sign of very strong bulls. The bulls will be back.
I have mentioned several times over the past few years the the Emini will correct down 40 – 50% within 5 – 10 years. I think it will be sideways for many more months and then have one last leg up. This trading range would then be the Final Bull Flag. The reversal down will probably fall further than what most people think is reasonable. I also believe that the stock market will be like the 1970’s for 5 or more years. Then, it was in a trading range with several selloffs of 20 – 50%.
Absolutely agree with everything you said but would a TBTL on the monthly back to the top of 2016 TR even qualify as a bear trend from a monthly chart perspective or just a 2 legged correction. The Bull trend line from 2009 is around there and a break below it before we reverse would get us to that double bottom…it would still not qualify as a bear trend from a monthly perspective. Your Analysis on the weekly and daily call for another push down….after some up coming next week..that could really give us a bear bar for Nov. Obviously all bets are off if Nov has a bull reversal.
I would not call a 10 bar swing down a bear trend unless there were consecutive big bear bars at a minimum. Even then, it would still probably only be a strong minor reversal. It could grow into bear trend, but a trend typically needs 20 or more bars. It would be a bear trend on the daily and probably weekly chart, but not on the monthly chart.