In this Stock Market Report for August 2013, I discuss the probability of the stock market putting in the high of the year over the next several weeks as well as a case for 1875 in the S&P within a year or so. I also talk about the price action in monthly bonds, gold, and the dollar.
Hi, I’m Al Brooks, and I wanted to take this opportunity to talk about some of the higher time frame charts. The monthly, the weekly, the daily charts in the stock market, in bonds, the dollar, and in gold. Today’s date is August 4th, 2013. I think there are some interesting price action that’s happening right now. And I’d like to talk about the possibility that we’ll be seeing the high of the year this month.
This is a monthly chart of the cash index of the S&P 500. Everyone sees it had a double top. It tried to form a triple top here and instead of getting a bear break-out we have a bull break-out. When you get a bull break-out out of a top, the market usually has at least 2 legs up. That means it will have a pull-back probably and then 1 more push-up. I do not think this is 2 legs here – 1 and then pull back and 2. The purpose of this chart is simply to show that the market is breaking out strongly above a double top of a monthly cash index.
The next slide is the identical chart but with some lines drawn on it. I think this chart has some important information. As I said, the market tried to form a triple top – a high here, a high here, and a lower high here. You can call it a double top and a pull-back. The market broke up below the double top, the neck like of the double top and it pulled back. It tried to form a lower high. You can call it a lower high major trend reversal, a triple top. It does not matter what you call it. I think the important thing is at the time it tried to form a wedge. A wedge top normally breaks out through the bottom. Maybe 2 chances out of 3. One chance out of 3 you get a strong breakout out of the top. This is what we have happening right now. When you do get a bull breakout out of a wedge top, you have to be thinking about magnets. What could be drawing the market up?
I usually use projections and there are different ways to do the projections. I think this red one is the most obvious one. If you look at the bottom of the wedge, the top of the wedge and then the measured move up is right here. For me the target over the next year or so is 1874.
Now I said that when you get a bull breakout out of a topping pattern, the market normally has 2 legs up. We’ve had 1 leg up. So at some point we get a pull-back. The pull-back could be 2 or 3 bars. It could be 10 or 20 bars. But we get a pull-back and then probably 1 more push up. So I think it’ll take a year or 2 to get up there. We had a double bottom here. There’s 1 low, there’s the other low. Double bottoms are rarely exact. You could also do a projection up from that double bottom that takes us to 1730. So maybe we’ll top out at the first leg at 1730, have a pull-back, 1600, maybe below, and then get the second leg up.
Here’s the E-Mini chart. The same thing, we have a wedge here, 1, 2, 3. And we have a very strong bull breakout out of the wedge. So again, probably 2 legs up. Why 2 legs? Well, you have the bulls buying strongly and a lot of the bears will hold through the first push-up, waiting to see if it is very strong. It turned out that it is very strong. Once they see that it’s very strong, they’ll wait for the first pull-back to exit their shorts with a loss. When the bears start buying, that results in the second leg up. That’s why when you have a topping pattern that has a bull breakout, it usually has at least 2 legs up.
I want to draw some lines on this chart as well. While I think of it, let me just point out one thing about this breakout. We had 8 consecutive bars up on the monthly chart, 8 months up…is that 8? Maybe it’s 7. Seven consecutive bull bars. For me, I call that a bull micro channel. Then we have a bar here that traded below the low of the prior bar. So we have a bear breakout of a bull micro channel. This move is extreme and therefore unsustainable and climactic. And usually when you get a bear breakout below a bull micro channel the market goes up for 1, 2, or 3 more bars and then has a bigger correction. Bigger in terms of price and/or bars. So chances are, statistically 60% sometime in the next bar or 2, month or 2, we’ll start to have a bigger correction. This is probably part of a developing trading range. Remember I said I thought the market will have a second leg up. That trading range could be the correction from this first leg up and then a second leg up would probably follow.
Let me draw some lines on this chart as well. Here are some key points. You can draw a channel using this, that low, this high, that high, and we’re right at the top of the channel. Very often the market breaks out of the top of a channel like it did here, pulls back, breaks out a second time. If it reverses a second time, you usually get a move down to the bottom of the channel. So if we break out above the top of this channel and reverse, the target would be the bottom of the channel. At least a poke through the bottom of the channel. There could be 1 tick, it could be 50 points.
Downside targets also the breakout point, this high which corresponds to this area. Then we’re also double topping here with the all-time high and the futures contract, the E-Mini. And we have a micro double top here. A high here and a high here. So all factors, I think, give the market a 60% chance of pulling back at some point in the next bar or 2 in the monthly chart. In other words, in the next month or 2.
Let me switch to weekly charts. Here is the E-Mini weekly chart and here is that same channel. We touched it once here, we’re not quite to it here. This is the bottom of the channel. So if we do break out a second time and reverse the target would be somewhere down here. Right now that would be about 1400. I also drew in a tighter channel, right here, this purple line not quite to it. It comes in around 1730 or so, 1720. And it’s fairly parallel to this lower trend line. I think that makes it more reliable. So we have another way to draw a channel right here – this red line. So downside targets would be any of the trend lines below and then that prior low, and then the breakout points. Here, the prior highs. This prior low is also a potential target on the downside. Again, this is the E-Mini chart.
Here is the daily chart. The same line are here, right? You can see that big channel that went on for a long time on the weekly and monthly charts. This red line. We broke above it, we reversed down. We’re trying to break above it a second and a third time. Chances are, 60% maybe, we’ll break above it and fail and then come down and test the bottom of the channel. Which channel? This one? This one? This one? I don’t know. It could be any of them, it could be all of them. But those would be downside targets.
Now I also drew in a line connecting this high, the top of this strong bear breakout and then this high. We have a potential wedge top here as well. Now there’s something about the rally here that I think is very important and nobody’s talking about it. Look at the bars, OK doji bars, it opens and closes around the middle, prominent tails top and bottom. That is not what you typically see in strong bull trends. In strong bull trends you tend to see a series of consecutive bull bars. A lot more consecutive bull bars like in here or in here. You don’t typically see a lot of doji bars, a lot of small bars with prominent tails. This is not typical in a strong trend. It’s common in trading ranges. So the daily, just looking at the nature of these bars on the E-Mini futures contract I think is more consistent with a trading range. So I think at the moment we’re probably in a trading range and we’ve probably been in one since back here in March. We’re having an upside breakout of the trading range.
Most upside breakouts fail. I think this one will probably fail. We may come all the way up to the top of the channel right here in the 1730 area. We may turn down before then but in either case I think there’s not much left to the upside before we have a bigger correction. Targets on the downside, the breakout point here, prior and higher lows there. And then the channel lines, the trend lines below, here and here. So I think this is also consistent with trading range behavior.
Yes, we’re in a bull trend but I happen to believe that we’re in a trading range as well but we haven’t had that big test down yet. I think we’ll get it. I think a year from now we’ll say where did the trading range begin and we’ll say it began over here or over here. Yes, we’re still working higher but I think that we’ll end up working down to this low area sometimes in the next 2 or 3 years or something. I also think the upside over the next many months is limited. I said we’ll probably get that second leg up. Maybe we’ll get up to the 1870 area but neat term over the next several months. I think we’re going to correct down probably more than what people on television are talking about.
Here’s the bond chart. An incredibly strong bull trend in the bond market. This is the monthly chart. And everyone can see that ti went parabolic. We had a strong bull breakout above a double top. Here’s the double top. So instead of topping out we have a bull breakout. When we have a strong bull breakout of a double top you usually get 2 legs up. We’ve probably had it here. You can say well here’s another little double top here and we have another strong bull breakout. This may be the second leg up even though it did not go above that high. This may be the extent of it.
I’m going to put some lines on this chart. So I think this is a parabolic wedge pattern and I think we’ve had our 2 legs up and I think we’ve seen the high in bonds for probably the next 20 or 30 years. It’s possible that we can keep going up. I think not so I think bonds are probably a terrible long term investment for the next decade or 2. Short term, for a week or 2, a month or 2, 6 months at a time, sure. But if you’re planning on holding for a year or 2 or 3, I think ti would be a mistake.
You can see we topped out, we have a channel. We topped out at the top of a channel. We tried to turn down once, failed. We broke out again a second time and we succeeded. Downside target, bottom of the channel at a minimum. Maybe all the way down to the trend line down here. On the upside, you can see we had a double top. The last leg up began either there or here. If you take a measured move up, the market topped out right around there.
We had this exceptional strong bull breakout and I often look at the open of the first bar of the breakout and the close of the second bar of the breakout for a measured move up. We went a little bit above it but again we have resistance in the form of this measured move, this measured move, and the top of the channel. We tried to continue up twice and we were failing. So I think we’re going to go lower at a minimum here and be down here. We have a double top here and the projection down is here. Then ultimately all of these prior high or lows are targets over the next many years. For the bulls, they see this as a double bottom and they’re expecting a rally. I suspect that we’ll get a rally near term, at least test the bottom of the breakout point. We have this double top and a breakout below the neckline right here. Now we’re at a support level forming a double bottom. So I think over the next month or 2 we’ll rally in bonds. That could correspond to a sell off stock market.
Here’s the dollar index. I hear so much talk on television that to me it just doesn’t make sense. It sounds more emotional than rational and objective. This is a monthly chart on the dollar index. Obviously an extremely strong sell-off and we’re still in a bear trend. We’re still forming lower highs and lower lows but we’re also in a trading range. The channel is starting to get flatter and flatter. Now, the issue that everyone is discussing right now and I think again too much emotional discussion is whether the bear trend is going sideways and will resume down or whether it will reverse up. Whenever you have a strong trend like that, then a trading range, and the breakout 50/50 chance either direction. So the bears have a bear trend, and a trading range and they want trend resumption, a leg 1, leg 2 move down. Here’s leg 1, here’s the trading range so they want a leg 2 move down here.
The bulls want his trading range to be followed by a reversal and a measured move up. Maybe based on this low and that high which would take us somewhere up here. All of those people that I see on television that are speaking with confidence about the direction of the breakout I think are wrong mathematically. The longer the market goes sideways, the more likely the probability it becomes 50/50. I think we’ve probably gone sideways enough now so that the breakout either below here or above here, it’s a 50/50 bet. So will the next 10 points be up or down, I think it’s 50/50 chance. So I think the people who are speaking out on television are wrong mathematically. They are speaking from emotion instead of from math.
Gold, a very popular chart, very emotional. This is the monthly chart. A parabolic move up, low or high major trend reversal, strong bear breakout, possible 1 bar final flag, possible 3 pushes down. One, two, three. Possible reversal. However, we have about 10 bars down without a pull back. Ten bars where the market has not gone above the high of the prior bar. When that happens, usually the first time it gets above the high of the prior bar, it finds more sellers and buyers and has more down.
I know on television, Dennis Gartman says that this is a major low in gold. But if you paid attention to his trades over the past many years, you’d probably discover that he’s not a very good trader. At least he does not appear to be on television. He actually lost money shorting gold in here. He said a few weeks ago that he shorted gold. I don’t know if it was long gold or short at the end or something like that but in any case, he said he lost 2% over the past year or 2 on his spread trade. I thought it was a dumb trade every time he mentioned it. But he’s now predicting this is a major low in gold and I think mathematically he’s wrong. We have a 10 bar bear micro channel, about 10 bars without a pull back.
The first pull back, the first time the market goes above the high of the prior bar, it will probably find sellers, 60% probable and then have at least a little bit more down. So I think a 60% chance we might go up above this bull bar but then turn down. So this is similar to the E-Mini chart. In the E-Mini chart we have the monthly bull micro channel and first pull back led to a new high. Here we have a bear micro channel in the monthly gold chart and the first pull back will probably be met by sellers and lead to a new low.
Here are some lines on the gold chart for some targets. I could have drawn a projection based on this double top, either this high or that high, and then this high where it projects down here. We’re already below that projection. So the next projection that I would use is the height of this upper trending range that projects below where we are and then the breakout above this high. Or even this swing low or other targets. So we have targets below, magnets below, we have this trend line as well. That coupled with this strong bear micro channel, to me, makes me believe with a 60% chance that we will not go up very high. We might get all the way up here, I don’t think we will, we might. But I think we’ll just go up for a bar or 2, a month or 2 and then start the next leg down.
That’s all I wanted to say. Everything that I’ve talked about is from my Brooks Trading Course at BrooksTradingCourse.com. I also have as most of you probably know a day trading room where I talk about trades on the 5 minute E-Mini chart every day. This is a separate website. I have the BrooksTradingCourse.com website where I sell the trading course and then this other website BrookPriceAction.com is run by some traders. It’s where traders sign up for my daily trading.
So I hope you enjoyed the points that I’m making and I hope that you find it useful. Again, this is Al Brooks. Thank you for your attention.
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