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E-mini Confirmed Breakout Above September Trading Range

By Al BrooksMarket OverviewOct 12, 2020 08:14AM ET
E-mini Confirmed Breakout Above September Trading Range
By Al Brooks   |  Oct 12, 2020 08:14AM ET
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The S&P E-mini futures market broke above the September trading range this week. It might gap up on Monday. There is now a 60% chance that this rally will test the September 2 all-time high.

The Bond futures weekly chart has been in a trading range for 7 months. There is now a 4-month triangle. The chart is in Breakout Mode, but it will probably continue mostly sideways for many more weeks.

The weekly EUR/USD Forex chart reversed up over the past 2 weeks after a reversal down from a wedge top. However, the 4-week selloff was probably not enough of a correction after a 4-month rally. Traders expect a lower high and then a 2nd leg sideways to down.

30-Year Treasury Bond Futures

Bond futures weekly chart has a triangle within 7-month tight trading range

Bond Futures Monthly Candlestick Chart
Bond Futures Monthly Candlestick Chart

The weekly bond futures sold off for the past 2 weeks, but they are still in a 7-month tight trading range. Consequently, reversals and failed breakouts are more likely than the start of a trend.

The bears see the past 7 months as a head and shoulders top bear flag. The neckline is the June 5 low. However, every head and shoulders pattern also is a triangle. The bulls see the past 4 months as a triangle. They therefore are hoping for a reversal up from the Aug. 28 low.

But head and shoulders patterns and triangles are trading ranges. Traders know that most breakout attempts up and down fail, resulting in a continuation of the trading range.

One of these legs up or down will grow into a trend. But picking which one will be the start of a trend before there is a clear breakout is a low probability bet. Traders will make more money betting on reversals until they see consecutive closes above or below the trading range. They expect the trading range to continue for many more weeks, and possibly for the remainder of the year.

Reversal from March buy climax is still forming a trading range

March was the end of the most extreme buy climax in the history of the bond market. When there is a reversal down from a buy climax, the chart usually enters a trading range. The bulls want to give the bears at least a couple chances at reversing the trend. If the bears repeatedly fail, the bulls buy again and the bull trend resumes.

The weekly bond chart is still deciding between a trend reversal down and a protracted pause in a bull trend. As long as the chart is sideways, the odds are about the same for the bulls and the bears.

Since the buy climax was the most extreme in history, the bears have a slightly high probability of a test down to lower support. The nearest significant support is the June 5 low, which is the bottom of the 7-month trading range.

Below that is the August 28 high, which it the breakout point of the February/March buy climax. Finally, when there is a reversal down from a buy climax, the market often returns to the bottom of the buy climax, which is the Nov. 7 low.

EUR/USD Forex Market

EUR/USD weekly chart is resuming up, but the pullback might have been too brief

EUR/USD Forex Weekly Chart
EUR/USD Forex Weekly Chart

The EUR/USD weekly chart triggered a High 1 bull flag buy signal this week when this week went above last week’s high. This week was a strong bull bar and it closed on its high. That makes higher prices likely next week.

It is important to remember that the weekly chart had a wedge climax at major resistance. When there is a reversal down from a wedge buy climax, it is reasonable to expect the pullback to last about half as long as the rally. The current selloff only lasted 4 weeks, but the rally lasted 4 months. Therefore, the 2-week rally will probably lead to a lower high and then a 2nd leg sideways to down.

The 4-month rally stalled at the September 2018 high. That was the start of a 2-year bear channel after a strong spike down. When there is a reversal up from a Spike and Channel Bear Trend, the market typically rallies to the start of the channel and then enters a trading range. That will probably happen here.

The bulls hope that the 4-week selloff was simply a bull flag. They want the bull trend to resume and break above the Sept. 1 high. That was the top of the 4-month wedge buy climax. If the bulls get a couple closes above that high, traders will look for the trend to continue up to the February 2018 start of the bear trend, at around 1.25.

Breakout points are magnets below

While the bulls might achieve their goal within a year, it is more likely that the September reversal down will test major support below. That is what typically happens when a market reverses down from an extreme buy climax at resistance.

There is currently better than a 50% chance that the pullback will continue down to below major breakout points. Those are the Mar. 9 high of 1.1496 and the June 10 high of 1.1422.

The rally from the March low was a wedge, but it was also a Spike and Channel Bull Trend. The channel began with the June pullback. Therefore, the June 19 low at the bottom of the pullback is an additional magnet below. Will the EUR/USD fall that far? At the moment, the bears have a 40% chance.

The past 2 months have been mostly sideways. This selloff is not a strong bear trend. However, lower prices over the next few months are still likely. This is true even if the EUR/USD first rallies back toward the top of the 3-month trading range.

But if the bulls get a couple more consecutive big bull bars closing near their highs, the odds will shift in favor of a breakout above the September high.

S&P 500 E-mini Futures

Monthly E-mini chart is forming an ioi Breakout Mode pattern

Emini S&P 500 Futures Monthly Candlestick Chart
Emini S&P 500 Futures Monthly Candlestick Chart

The monthly S&P 500 E-mini futures chart had a big outside down bar in September, but October so far is a bull inside bar. That means its low is above the September low and its high is below the September high. The bar before an outside bar is “inside” of that outside bar. Therefore, there is an ioi (inside-outside-inside) sequence on the monthly chart. This is a Breakout Mode pattern.

If October remains inside through the end of the month, it will be both a buy and a sell signal bar for next month. Since the monthly chart is in a bull trend, the bulls see October as a brief pullback. It would therefore be a High 1 bull flag buy signal bar.

However, September reversed down from a breakout above the August high and a 10 year bull channel. The bears are hoping that the outside down move in September was the start of a bear trend. They see October as a pause in their new bear trend. If October remains an inside bar, it would be a Low 1 sell signal bar in addition to being a High 1 buy signal bar.

Breakout Mode is neutral

Let’s assume that October remains an inside bar. When a chart has a breakout mode pattern, there is a 50% chance that that 1st breakout up or down will fail. Furthermore, there is about a 50% chance that there will be a successful bull breakout and about a 50% chance of a successful bear breakout.

These numbers vary a little, depending on context (context means the bars to the left). They are higher in a bull trend, like the one currently on the E-mini monthly chart. But they are lower when there is a reversal down from a buy climax at resistance, which is also like the E-mini monthly chart. If October closes in the middle of its range, traders should assume that the bulls and bears each have a 50% chance. If October closes on its high, the odds will favor the bulls.

Buy climaxes attract profit-taking

How much higher can the bull trend go? When there is an extreme buy climax like this, traders are looking to take profits. Therefore, if October remains an inside bar and November triggers the buy signal by going above the October high, the rally will probably only last another bar or two and become a 2nd buy climax. Traders would expect a 2nd reversal down from a micro double top.

If that were to happen, there would be a 60% chance of profit-taking. The bulls would sell out of their longs and the bears would begin to short. The selloff at that point would probably have a couple legs sideways to down and it could last 5 to 10 bars. Traders would look for as much as a 50% correction of this year’s rally.

Many bulls who take profits want to give the bears a couple chances to create a trend reversal down. That means a lot of bulls will not look to buy aggressively again after profit taking until they see a couple legs down.

I said that there would be a 60% chance of profit-taking. That means that there is a 40% chance of the E-mini continuing up for several more bars (months) before traders consider taking profits again.

How likely is a bear trend after an expanding triangle top?

The monthly chart has been forming higher highs and lower lows for 3 years. This is an expanding triangle. The bears hope that either September was the start of a bear trend or there will be an additional 1–2 bars (months) up and then the start of a bear trend.

But this potential top is following 5 big bull bars. Even with a possible expanding triangle top, the 1st reversal down will probably be minor. A minor reversal means one that will become either a bull flag or a bear leg in what will evolve into a trading range.

There is only a 30% chance that a minor reversal pattern will in fact lead to a major trend reversal. Consequently, the best the bears can probably get in a 1st reversal down, is a pullback to around the middle of the 3-year trading range, before the bulls begin to buy aggressively again.

2 paths forward

The are two possible outcomes for the next 6–12 months that are most likely. Both involve a micro double top with the September high and both should lead to a couple legs down lasting 5–10 months.

I already mentioned the first, where October remains an inside bar, November breaks above October, and then there is a reversal down a month or two later from a micro double top with the September high.

The 2nd likely outcome is that the E-mini continues down for another month or two. The bulls would buy the pullback. Traders would then expect the bull trend to test the old high and probably make a new high.

After such a strong buy climax this summer, traders would expect the bulls to take profits after this 2nd buy climax. That would create a micro double top with the September high. Traders would then expect a more prolonged selloff after consecutive buy climaxes, and at least a couple legs sideways to down. That process would probably take 6–12 months.

Consecutive buy climaxes tend to lead to deeper and more protracted profit taking. Traders would begin to expect a possible two or more legs down to about a 50% retracement of the rally from the March low. This could extend into the middle of next year.

Therefore, traders have the same expectation for the coming year whether there is a pullback in November and then a brief new high, or if the Emini continues up in November without pulling back first and then reverses down.

Weekly S&P 500 E-mini futures chart is accelerating up from weak High 2 bull flag at the EMA

Emini S&P 500 Futures Weekly Candlestick Chart
Emini S&P 500 Futures Weekly Candlestick Chart

The weekly S&P 500 E-mini futures chart reversed up 3 weeks ago from a High 2 buy signal at the 20-week EMA. The buy signal bar was not impressive and it followed a buy climax and 3 bear bars. Traders expected a 2–3-week bounce and then another leg sideways to down.

But this week changed the expectation. This week closed near the high of the bar, and above the minor lower high from 3 weeks ago. It therefore broke above the 4-week trading range.

Next week might gap up on the weekly chart. Gaps on the weekly chart are normally uncommon. However, there were many in July and August, although most of the gaps closed before the end of the week. Those prior recent gaps increase the chance of a gap up on Monday.

This week was a big bull bar closing on its high. The close above the minor lower high from 3 weeks ago means that this week was a breakout bar. Traders see it as a Surprise Bar.

A Surprise Breakout is always a low probability event. Traders were positioned for one thing but got something else. There is usually at least a small 2nd leg sideways to up. Therefore, traders will look to buy a 1 to 2-week selloff.

If next week is a 2nd consecutive bull bar closing on its high, traders will expect a test of the September all-time high. If next week is a bear bar closing near its low, traders will conclude that this week’s breakout failed.

Possible small double top bear flag

If the E-mini turns down next week, traders will wonder if this week was a bull trap. The bears would see this week as the 2nd leg up in a double top bear flag with the minor lower high from 3 weeks ago.

A double top bear flag often breaks below the neck line and leads to a measured move down. If the 2nd leg up is strong, there is only a 40% chance of an immediate reversal down to below the neck line (the low of 3 weeks ago) and a measured move down. More often, a reversal down is minor. That means it would just be another leg in the trading range that began in early September.

Daily S&P 500 E-mini futures chart has a confirmed breakout above a trading range

Emini S&P 500 Futures Daily Candlestick Chart
Emini S&P 500 Futures Daily Candlestick Chart

The daily S&P 500 E-mini futures chart reversed down from a buy climax in early September. It was in a trading range for a month.

Thursday broke above the top off the range. Additionally, the E-mini broke above the top of a wedge rally.

Friday was the follow-through bar, and because it also was a bull bar closing above the range, it confirmed the breakout. A confirmed breakout has a 60% chance of a swing up.

Traders expect a possible measured move up based on the height of the trading range and the wedge. Also, they expect the rally to have at least 2 legs up. The bulls will buy the 1st 1–2-day pullback.

Since the buy climax at the all-time high was extreme, it will be resistance. It might prevent the E-mini from reaching the measured move target. The bears will try to get a double top with the Sept. 2 all-time high.

Can the 2-day breakout fail? Of course, it can, but the bears now have only a 40% chance of a reversal down next week. The bears will probably need at least a micro double top because the bulls will buy the 1st attempt to reverse down.

As I wrote above, the E-mini might gap up on Monday because of the weekly chart. If the gap stays open and Monday closes near its high, the E-mini will probably race up to the old high.

E-mini Confirmed Breakout Above September Trading Range

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E-mini Confirmed Breakout Above September Trading Range

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Comments (1)
John Quinn
John Quinn Oct 17, 2020 6:12PM ET
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I've been reading your articles and I'm a little confused.  When you mention something like "a 60% chance that this rally will test the all time high...", what guide are you using to come up with the math?  Is there research to support it?
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