Market Overview: Weekend Market Update
The Emini gapped above the 2900 resistance level this week. Traders want to see follow-through buying next week. If they get it, they will expect a new all-time high within a month. The bears want a reversal down from a wedge rally to resistance.
The crude oil futures market has been in a strong bull trend for 4 months. However, the big bull bar from 2 weeks ago might be a blow-off top. The bulls will probably begin to take profits soon. Once they do, there will likely be a pullback for at least a couple weeks.
The EURUSD Forex market bounced over the past 2 weeks. It is in Breakout Mode. Everyone is waiting for news from Brexit. But, traders need to understand that the breakout can come on any unexpected news, even if the news appears minor.
Crude oil Futures market:
Strong bull trend, but possible exhaustion soon
The crude oil futures weekly chart had a big bull bar last week and a small bull bar this week. When a big bar comes late in a bull trend, it attracts profit takers. If enough traders take profits, the bull trend will pull back. It could then enter a trading range.
When a rally is as strong as this one has been, the 1st reversal down is typically minor. That means either a bull flag or a bear leg in what will grow into a trading range. The bears therefore will only take quick profits and the bulls will buy the selloff.
Transition into trading range likely soon
Traders do not believe that a bear trend will start within the next couple weeks. However, a trading range is becoming increasingly likely. The first target for the bears is the March 21 high, which is the breakout point of the April 1 bull breakout.
The rally has broken above the 3 month bull channel on the weekly chart. That typically leads to profit taking. It is also at a measured move projection based on the March 13 breakout. The March 25 low tested the March 1 high. Therefore, the March 13 bar was a good candidate for a measuring gap.
But resistance is not enough of a reason to sell a strong bull trend. The bears want to see bear bars closing below their midpoints, big bear bars, and consecutive bear bars. Without that, the Small Pullback Bull Trend will continue. The bulls will keep buying small pullbacks until they start to see big pullbacks.
EURUSD weekly Forex chart:
Minor rally in weak bear channel
The EURUSD weekly Forex chart formed a bull trend bar this week after 3 bear bars. But, the body was not especially big and there was a conspicuous tail on top. This is not yet a strong bull trend reversal. Furthermore, the chart has been forming lower highs and lows since January 10. In addition, every leg up or down for 6 months has reversed after 2 – 3 bars. The bulls need much more before traders will conclude that a bull trend reversal is underway.
What about the bears? They keep getting lower highs and lows, but the bear channel is almost horizontal. Traders are trading it like a trading range. They are buying low, selling high, and taking quick profits.
Since the bear channel is essentially a tight trading range, the weekly chart is in Breakout Mode. Traders are waiting for a strong breakout up or down before concluding that the trading range has ended and a trend has begun.
When a market is in Breakout Mode, there is a 50% chance that the 1st breakout up or down will fail. Furthermore, there is a 50% chance that a successful will be up and a 50% chance it will be down.
Until there are consecutive closes above or below the range, traders will assume that the trading range is still in effect. They will then continue to buy low, sell high, and take quick profits.
Longest trading range in 2 years
This trading range has lasted 5 months. That is the longest trading range in 2 years. Consequently, traders expect a breakout up or down at any time.
Everyone assumes that the breakout will come on Brexit news. Europe and the Brits keep deferring the conclusion. It is a mistake to believe that this is the only catalyst. The breakout can come at any time and on any news.
This includes news that initially appears insignificant. Sometimes the news will report something as minor. Then, several weeks later after a big move in the markets, they will say that the news caused the big move.
Monthly S&P500 Emini futures chart:
Regaining momentum up
The monthly S&P500 Emini futures chart has a fourth consecutive bull trend bar so far this month. After 3 months with shrinking bodies, April’s body is currently bigger than March’s. This is a sign that the bulls are regaining momentum. If the month closes near its high, May will probably test the 2956.00 all-time high.
Less likely, the Emini could sell off in the 2nd half of April. If April closes with a bear body, it would be a sell signal bar for May. The bears would see the 4 month rally as a lower high major trend reversal. It would also be a head and shoulders top.
Even if April closes on its low, the odds would still favor only a minor pullback. It could last a couple months. Traders would probably buy below the April low, expecting a quick resumption back up to the September all-time high.
Weekly S&P500 Emini futures chart:
Strong breakout and follow-through
The weekly S&P500 Emini futures chart triggered a credible sell signal 3 weeks ago. But, last week closed above the sell signal bar’s high. In addition, it was the 2nd consecutive bull bar closing near its high. And now this week also closed near its high. This strong breakout and follow-through make higher prices likely. Consequently, even if the Emini reverses down for a week or two, the bulls will probably buy the selloff.
Whenever there is a breakout, there is at least a 40% chance it will fail. It sometimes reverses abruptly. More often, the bears need at least a micro double top. Consequently, even if the Emini sells off for a couple of weeks, the bulls will likely buy it.
A reversal down less often comes without a micro double top. When it does, the bears want to see strong evidence that the bulls have given up. That can come from a surprisingly big bear bar, or 3 or more consecutive smaller bear bars. At that point, the bears would begin to sell, looking for at least a small 2nd leg down.
Daily S&P500 Emini futures chart:
Emini gap above 2900 resistance but buy climax and 3rd leg up
The daily S&P500 Emini futures chart gapped up on Friday above the 2900 resistance level. It is in its 3rd leg up over the past month. The 1st two legs were the March 4 and March 21 highs. A reversal down next week would therefore be from a wedge top.
However, the bull channel over the past 3 weeks is tight. And so is the entire 4 month bull channel. When that is the case, the 1st reversal down is typically minor. A strong bull trend usually has to transition into a trading range before it can reverse into a bear trend.
What about those wedge tops?
A strong bull trend is constantly forming wedge tops. But my 80% rule on inertia says that 80% of trend reversal attempts fail. Therefore, betting on a wedge reversal is a low probability bet unless there are other factors.
Sometimes the wedge can have decent selling pressure, like big pullbacks after the 1st 2 legs. That increases the chance of a reversal. That is not the case with the current rally.
The rally of the past 3 weeks has been especially strong. It is therefore climactic. A buy climax can go very far up before the bulls get exhausted and take profits. However, traders should always be thinking of both a plausible bull and bear argument.
The argument for the bears is that there are now 3 pushes up. They want the breakout above 2900 to fail and reverse down from a wedge top. For them, Friday was not a big bull trend bar. It is therefore a sell signal bar for Monday.
Since it was not a big bear bar, it is a weak sell signal. They know that they only have a 40% chance of a reversal down this coming week. But, they will sell if the Emini starts to drop.
Possible island top
If the Emini gaps down this week, it will form an island top with Friday’s gap up. Island tops and bottoms are common and are minor reversals. Consequently, an island top next week is no more likely to lead to a bear trend than any other type of reversal.
The key for the bears is not an island top, but rather a strong reversal down. They need to start to create bear bars. They especially need some combination of bear bars closing below their midpoints, consecutive bear bars, and big bear bars. Without that, the odds continue to favor a test of the all-time high.
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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.