Market Overview: Weekend Market Update
The Emini triggered an “oo top” sell signal this week when Thursday traded below consecutive outside bars on the daily chart. It will probably trade down for 2 – 3 weeks, even if there is one more minor new high first.
Crude oil began a correction from a 4-month buy climax. It is testing support around $60, and it will probably be in a trading range for several weeks.
The EUR/USD Forex market has been in an 11-month bear channel with no end in sight. Traders are betting on reversals up and down every few weeks.
Crude oil Futures market:
Trading range after a buy climax
The crude oil futures market is finally pulling back after a strong 4-month rally. Since the December low, I have been writing every week that crude oil would likely continue at least a little higher.
In mid-April, I changed and said that it would probably soon reverse down for at least several weeks. This was because the April 18 tight trading range was a good candidate for a Final Bull Flag. Also, there was an important measured move target just above 66. I said that a reasonable 1st target was the March 21 high of 60.50. That was the most recent breakout point, and it is still a good minimum objective fore the selloff.
Where is support?
When there is a reversal down from a buy climax, the bull trend typically evolves into a trading range. Traders should expect that for at least a few weeks. It could last a couple months. The bears are just probing for support.
Traders are deciding where the bottom of the trading range will be. The 1st leg down will probably end around 60, but it could be at any of the 2019 higher lows. There will then probably be a bull leg in the trading range. Traders should expect at least 2 – 3 legs before there is a breakout up or down.
The entire 2019 rally is a spike and channel bull trend. The spike began with the December low and ended with the January 11 high. Once there was a pullback, the channel began. That pullback was the January 14 low. Ultimately, that is a target for the bears, but they may not reach it for many months.
EURUSD weekly Forex chart:
11-month bear channel
The EUR/USD weekly Forex chart has been in a bear channel for 11 months. It has been forming lower highs and lows since June, 2018. Legs up and down have lasted only a few weeks before there was a reversal. There is no evidence that this trend is about to end. Traders will continue to bet on reversals every 2 – 3 weeks.
Channels often spend a lot of time in trading ranges. The EURUSD Forex market had been in a tight trading range for 5 months on the daily chart. Two weeks ago, the bears broke below the trading range. Because they got consecutive closes below the range on the daily chart, the odds favor at least slightly lower prices.
The March 7 low of 1.1177 was the bottom of the range. It is also the neckline for the February 28 and March 20 double top on the daily chart. Since there were 2 closes below the neckline, traders are expecting a measured move down over the next couple of months. That target is 1.0942.
The bears want a measured move down based on the height of the entire 5-month range. That projects down to 1.0783.
How does a bear channel end?
These targets are reasonable as long as the bear channel continues. To end the bear trend, the bulls need a couple closes above the most recent major lower high. That is the March 20 high of 1.1448.
Even that is not enough. They then need a higher low and then a higher high. At that point, traders will conclude that the bear trend on the daily chart has ended.
The end of a bear trend usually means the start of a trading range. Less likely, a bear trend will reverse into a bull trend without forming at least a small trading range.
Monthly S&P500 Emini futures chart:
Double top, but higher prices likely
The monthly S&P500 Emini futures chart had 4 consecutive bull trend bars closing near their highs through April. That is extremely strong buying. Also, the rally was from a monthly bull trend line. Traders aggressively bought a test of support and are unlikely to give up easily. Consequently, the bulls will probably buy the 1st pullback. For example, if May trades below the April low, the Emini would probably reverse back up in June.
So far, the May high is an exact double top with the September 2956.00 all-time high. Perfect double tops on higher time frame charts are rare. Therefore, the Emini will probably go above the September high within the next few months. May has only begun, and the Emini might get the breakout within a week or two.
Expanding triangle top likely
The Emini has been in a trading range for 16 months. Trading range breakouts usually fail. The September high and December low are examples of failed breakouts. Therefore, a break above the all-time high will probably fail within 1 – 5 bars. But, this is the monthly chart. That means that the top might be several hundred points above the September high.
A reversal down from a new high would create an expanding triangle top. Some call that a megaphone pattern. The ultimate target is a break below the expanding triangle, which is the December low.
Since a triangle is a trading range, if there is a bear breakout, there will probably be a reversal up. The pattern at that point would be an expanding triangle bull flag. The target for the bulls would be a new all-time high. At the moment, that is unlikely after a 10-year bull trend. More likely, the Emini will continue in a big trading range that could last for a couple more years.
At some point, the expanding triangle stops growing and it evolves into some other pattern. At the moment, the break to a new high will probably reverse. The reasonable objective would be about a 50% retracement of the 2019 rally. That would also be a test of the 20-month EMA. At that point, traders will decide if the bull trend will resume or the reversal will continue down to the December low.
Weekly S&P500 Emini futures chart:
Minor reversal after the perfect double top
The weekly S&P500 Emini futures chart has been in a small pullback bull trend for 4 months. This is unsustainable and therefore a buy climax. I wrote about this type of thing in January 2018. Back then, I said that a 5 – 10% correction would probably begin within weeks. The Emini sold off 10% in February.
Will the current rally lead to another 5 – 10% correction? Probably not. This rally is not nearly as climactic as that one. Back then, the Emini was the most overbought on the daily, weekly, and monthly charts that it ever had been in the 100-year history of the stock market. A big exhaustive reversal was likely.
Where is support?
There are reasonable targets between 2 – 5% down from this week’s high. An obvious one is the most recent breakout point. That is the March 21 high of 2866.00. The March 29 unusually big gap at 2840.50 is another magnet just below that.
The final nearby target is the March 25 low of 2789.50. That is the start of the most recent buy climax. The bottom of the most recent buy climax is always a magnet when there is a reversal.
Can a correction continue far below that? Unlikely. The Emini is in a tight bull channel. Traders expect the 1st reversal to be minor. It will therefore lead to a bull flag or a 2 month trading range rather than a trend reversal.
Daily S&P500 Emini futures chart:
Emini consecutive outside bars means an oo top
The daily S&P500 Emini futures chart did something unusual and important this week. Tuesday reversed up from below Monday’s low and reached Monday’s high. While not a traditional outside up day, it is a variant. In the Globex market, there was an actual outside up bar.
Wednesday then reversed down from above Tuesday’s high to below its low. It was therefore a 2nd consecutive outside day. That is an “oo top” (outside, outside, or consecutive outside bars) sell signal. It is always a double top on a smaller time frame. Since it is at major resistance and in a buy climax, it is a more reliable pattern.
When Thursday traded below Wednesday’s low, it triggered the sell signal. Traders should expect about 10 bars and 2 legs down as a reasonable minimum goal. The pullback could last longer. I talked about the targets in the Weekly section above.
oo Top, but minor reversal
It is common for the market to go sideways for a few days after an oo sell signal triggers. The bulls will try to resume the bull trend. However, unless the Emini breaks above the top of the oo (Wednesday’s high), the odds favor a couple legs down over the next 2 – 3 weeks.
Friday was a good bull day and it erased much of the bear argument. However, the oo top is still a sign of profit taking, which is likely at a prior major high. Consequently, whether or not the Emini breaks above Wednesday’s big outside down bar, it will still probably pull back for 2 – 3 weeks in May.
Even if the pullback is surprisingly deep and tests 2700, the odds still favor a new all-time high within a few months after that. An extremely strong bull trend like the one in 2019 typically will not reverse into a bear trend without first testing the top of the bull trend. Yes, April tested September’s high. But, the 2019 rally was strong enough so that its high will also probably get tested after any 1 – 3 month selloff.
Micro Emini begins trading on Monday
The CME will start trading the micro Emini contracts on Monday (S&P, Nasdaq, Russell, and Dow). The micro Emini S&P is 1/10th the size of the Emini. It might take a few weeks for the volume to get big. However, it will be tightly arbitraged with the Emini and therefore it should track it almost exactly.
The advantage is for beginning traders. There are often setups in the Emini that require too much risk for a small account. However, the micro contract should allow most traders to stay within their comfort zone. The small size will give traders a good opportunity to learn how to trade with much less risk. They then will be better able to focus on how to trade without constantly worrying about money. That is a very good thing.
Even if the round turn commission is only around $1, that is a problem for scalpers. In general, a trader should not take any trade where his transaction cost is more than 10% of his expected profit. If the cost is $1, a trader should not scalp for less than 2 points, which is $10 in the micro Emini.
Most traders should not scalp at all. A reasonable minimum goal with the mini Emini S&P is 4 points profit. For a day trader, that is a swing trade, and traders should always have swing trading as their goal.
Once they are consistently profitable, they can add scalping if they would like. However, most successful day traders are swing traders.