The Emini rallied to a new all-time high on Friday. While it broke above the 12-day tight trading range, the breakout was minimal. A trading range in a bull trend is a bull flag. As a result, the odds are that there will be more of a breakout. The breakout might last a couple of weeks.
Yet, this tight trading range will probably be the Final Bull Flag. As I wrote over the weekend, there is a 60% chance of a 40-point pullback and a 40% chance of a 100-point pullback in August. Hence, if there is a 5% pullback, it will test July 6 low.
That is well below the breakout point at the top of the 2 year trading range. It was the 1st pullback in the current Spike and Channel bull trend, which began in July. The Emini tries to test the low of 1st pullback, which is where scale in bears began to short. Because it is so far below, there is only a 40% chance of the Emini getting there without a more reliable top.
Emini Globex session
While the Emini is up 2 points and just below Friday’s all-time high, the bulls so far are unable to create a big enough rally that would probably lead to a gap up on the monthly chart. Friday was the 12th consecutive day in a tight trading range. The odds favor more trading range price action again today. Yet, there will probably soon be a big move down. There might be one more sharp move up first.
There is an adage in Wall St. that says when a small trading range forms just above a big trading range, the breakout will fail. Most sayings are true 40 – 60% of the time. Yet, this one makes an important point because it reminds traders that the current breakout above the 2-year trading range can fail. Therefore, traders need to be prepared for a reversal down. With all of the pundits extremely bullish, the sentiment is too positive. This means that the 'pain trade' is down, and this reinforces my belief that there will be a scary reversal down in August.
While a bear trend is possible, a bull flag is more likely. I think that the current high will not be the final high. The odds are that there will be at least a test up from any August selloff before a Major Trend Reversal can form.