Market Overview: Weekend Market Update
The Emini daily chart has a wedge rally that is testing the all-time high. Friday is a sell signal for a minor reversal down.
The 30 year Treasury bond futures weekly chart has a parabolic wedge top, which is also a Low 4 Top. It will trade sideways to down for many weeks.
The EUR/USD weekly Forex chart has a weak reversal up from the bottom of its 2-year bear channel.
30 Year Treasury Bond Futures market:
Strong reversal down from Low 4 Top and parabolic wedge buy climax
The 30 year Treasury bond futures market has rallied strongly since October 2018. The rally has been in a tight bull channel and the slope has been increasing. The 4 legs up on the weekly chart mean that the rally is a parabolic wedge buy climax. That is any rally with 3 or more legs in a tight bull channel.
It is important to note that the weekly chart is reversing down from just above the the July 11, 2016 high. This is therefore a slightly higher high double top in addition to the 2019 buy climax.
When there is a double top, the second leg up is often a wedge, like the case here. Traders know that this increases the chance of a successful reversal down.
Breakout above 2008 – 2016 nested wedge top
The July 2016 rally ended with a huge nested wedge top (not shown) where the first leg up was in December 2008. That is a reliable topping pattern. However, wedge tops often have one more new high before there is a trend reversal down. Traders can see that this might be happening here.
In general, a breakout above a wedge top has a 50% chance of a measured move up and a 50% chance of a reversal down. The bulls want a measured move based on the distance from the October 2018 low of 133 27/32 to the July 2016 high of 165 15/32. That puts their measured move target at just below 200, which is a Big Round Number and another magnet.
The odds vary depending on the context. Here, the probability of a measured move up is only 30%. This is because the 2016 nested wedge top is a reliable pattern and the 2019 rally is reversing down strongly from a reliable buy climax top.
Low 4 Top
The 2019 rally formed a Low 4 top. There was a reasonable attempt to create a lower high in March after 2 legs up. That was a Low 2 top.
But there was then a strong breakout above that top and that breakout had 2 more legs up to a second Low 2 top. The weekly chart is now reversing down again from a second consecutive complex top (one with 2 or more legs).
When there is a Low 2 top, a bull breakout, and then a second Low 2 top, that is a Low 4 top. That is a second major top after the July 2016 rested wedge top. It increases the chance of a major trend reversal down.
Since the bull trend lasted about 30 years, a major reversal down will probably last at least half as long. Traders therefore should expect interest rates to work higher over the next couple decades.
No negative interest rates
What about all of the talk on TV about negative interest rates? The weekly and monthly charts are telling us that the consensus among institutions is that it will not happen.
Why do they keep putting experts on TV who say that it will happen? Because in general, those who talk don’t know and those who know don’t talk. The smartest people do not feel a need to be on TV all the time.
However, the charts are showing us what they believe. It is very different from what the TV pundits are saying. You get to choose whom to believe. I believe the institutions and not the TV stars.
Major trend reversals take time
There is currently a credible top on the weekly and monthly charts. But will it be the final top? It is too early to tell. A trend reversal from a 30 year bull trend into a 20 year bear trend is not going to be abrupt.
The current topping process began 3 years ago with the 2016 high. Traders should not be surprised if this current buy climax lasts many months and has a small higher high before there is a trend reversal.
The 2019 rally on the weekly chart was a parabolic wedge buy climax. A tight bull channel does not typically instantly reverse into a bear trend.
More often, a trend reversal down from a parabolic wedge top often forms a tight trading range that is tilted down slightly. The bulls see it as a bull flag. It can have 10 – 20 bars. The best the bulls can probably get over the next few months is a rally in trading range. Traders should expect sideways to down trading for many months.
On the weekly chart, it could easily last for the rest of the year. If this Endless Pullback type of reversal happens, traders will not conclude that the trend has reversed until there is a strong break below the bear channel. Therefore, while the top for the next 20 years might be in, traders need more evidence, which will take many more months.
EUR/USD weekly Forex chart:
Weak bull trend reversal attempt from bottom of yearlong bear channel
The EUR/USD weekly Forex chart this week formed a micro double bottom with last week. This is occurring at the bottom of the bear channel that began in November 2017. It is also at the bottom of a bear channel that began this June.
However, the bull bodies for the past 2 weeks were small. This week is therefore not an especially strong buy signal bar for next week. The bulls need a strong reversal up over the next couple weeks before traders will conclude that the 2 month selloff has ended.
But even if the bulls get their rally, traders know that every reversal up over the past year failed and led to a reversal down after a few weeks. There is no reason to believe that this bottom attempt will be different.
2 Double top bear flags
There are measured move targets below. Measured move targets, like all support, are magnets and they draw the market to them. The July/September 2018 double top and the March/June 2019 double top both project down to just above 1.08. Additionally, the gap above the April 21, 2017 high of 1.0777 is also a magnet below.
With 3 magnets near one another and only about 100 pips below the September low, the bear channel will probably continue down. This is true even if there is a first a 200 – 300 pip rally up to the August 6 or August 26 lower highs.
The bulls need a strong break above the June 25 major lower high of 1.1413 before traders will begin to wonder if the bear trend has ended. Without that, traders will continue to believe that the sequence of lower highs and lows will continue.
Monthly S&P500 Emini futures chart:
Resumption of 2019 bull trend
The monthly S&P500 Emini futures chart so far has a big bull bar in September. I have been writing the same thing every week since June. May was an outside down month and June was an outside up month. Once July went above the June high, it triggered an oo buy signal (consecutive outside months).
That meant that the Emini was likely to go sideways to up for at least 3 months. September is the third month. If it closes near its high, October will probably go even higher.
There is no sign of a top. But if the bears get a reversal bar within the next few months, it would be a sell signal bar. Traders would see it as a second sell signal for the expanding triangle top that began with the January 2018 high. It would also be a second sell signal for a failed breakout above the double top.
Weekly S&P500 Emini futures chart:
Third leg up in yearlong bull trend
The weekly S&P500 Emini futures chart has rallied for 3 weeks from a higher low in August. This is the third leg up in the rally that began at Christmas. There is no sign of a top so the odds favor sideways to up over the next week.
If the Emini reverses down from above the July high, there would be a wedge top on the weekly chart. But a strong bull trend like this typically needs at least a micro double top before there will be a bear trend reversal. Consequently, the downside risk over the next few weeks is small. The Emini would probably have to stop going up and begin to go sideways for at least 3 weeks before the bears could get a credible sell setup.
Daily S&P500 Emini futures chart:
Emini wedge rally and minor reversal down likely
I have been writing every week since the August selloff that there would probably be a new all-time high this year. I have been saying that it most likely would come in September or October. The daily S&P500 Emini futures chart is testing the all-time high. While the bears do not have a credible top, there are a 3 problems with this rally.
First, this week was the fourth leg up in the bull channel that began on August 23. Three or more legs up in a bull channel is a wedge. Once there are 3 legs, the odds of profit-taking go up. Consequently, there is an increasing risk of at least a small pullback within a couple weeks.
Second, the gap above the August trading range was likely to have at least a small second leg up. This week was that second leg. However, the gap and this week’s rally were not strong enough to make a third leg up likely. Therefore, there is a 50% chance of a pullback within a couple weeks.
Breakout above ledge top so pullback likely
Finally, ledge tops typically have bull breakouts and then pullbacks. On September 3, I said that the odds favored a breakout above the August trading range.
There were 4 highs in August at almost exactly the same price. This is easier to see on the weekly chart. When there are 4 or more bars with the same high, there is a ledge top.
Ledges on the daily and weekly charts are never perfect. But the closer to perfection they are, the more likely the market will behave as it does with a ledge. This ledge is as close to perfect as you are going to see.
On a 5 minute chart, a ledge top has 4 highs that are identical to the tick. There would then be an 80% chance of a bull breakout.
Ledge tops are much less common on weekly charts. But markets are fractal. This means they behave the same on all time frames. Therefore the odds favored the bull breakout.
However, there is one other interesting characteristic of ledge tops. The top of the ledge is an important price. When the Emini is below it, traders expect a rally to at least a little above the ledge.
But the top of the ledge remains a magnet even after the bull breakout. On a 5 minute chart, there is an 80% chance of a pullback below the top of the ledge by the end of the next day. Most of the time, the pullback begins within 20 bars.
Since ledges are rare on the daily and weekly charts, the sample size is small. This makes it is impossible to know exactly how likely the pullback is. But it is reasonable to assume that there will be a pullback to below the top of the ledge within about 20 days. That means by the end of October.