Market Overview
The Emini reversed up sharply in January. It is now back in the middle of the 2018 trading range. While it will probably go a little higher, traders will look for a test down to 2,500 – 2,600 beginning in February. They will buy the selloff, expecting a 2nd leg up.
The crude oil futures market rallied strongly for 6 weeks after a sell climax. As strong as the rally has been, crude oil is now in a resistance zone. It will therefore likely begin to trade down to below $50 over then next few weeks before bulls will buy again.
The EUR/USD monthly chart has a wedge bull flag and a 50% correction. a bull breakout is more likely than a bear breakout. But, there is no bottom and no breakout yet.
Crude oil Futures market: Buy climax near resistance
The crude oil futures have rallied for 6 weeks. I have been writing since early December that the 3 week December trading range would probably be the Final Bear Flag. I then wrote during the strong selloff in December that the daily chart would rally about $10 to the top of the December trading range.
It reached the target 3 weeks ago. This week traded below last week’s low and then closed above last week’s high. This week is therefore an outside up week.
By closing above last week’s high and at this week’s high, the odds are that the rally will continue up to the next resistance. That is the 20-week EMA and the February 2018 low. Both are around $57. Above that is the 50% retracement, which is around $60.
Can crude oil continue much higher without 1st testing down?
Because crude oil is near a cluster of resistance points, it can pull back at any time. It will likely pull back for several weeks soon after it reaches the 20-week EMA.
When it does, it will probably retrace about half of the rally. But, when a bull trend reversal is strong, there will typically be buyers below, expecting a 2nd leg up. Consequently, the bulls will probably be eager to buy below $50.
EUR/USD monthly Forex chart: Wedge bull flag at a 50% pullback
The EUR/USD monthly Forex chart sold off over the past year after testing the bottom of a 14-year trading range. The rally was also a test near the top of its bear channel.
In 2018, it retraced about half of the 2017 – 2018 rally. In addition, it is testing the support of the 2015 – 2016 trading range high. Furthermore, 7 of the 8 past months have been small bars and doji bars. This represents a lack of momentum down. Traders are less willing to sell at this point. The market will probably have to go higher to find a price where bears will be willing to sell.
Finally, the bulls see the selloff as a wedge bull flag after a strong bull trend. They know that the odds favor a 2nd leg up after such a strong rally. However, there is no clear buy signal bar. Also, the yearlong bear channel is tight. Consequently, the bear channel might have to continue a little lower as it searches for buyers.
Bear trend or bull flag?
Despite the yearlong selloff, it is more likely a bull flag on the monthly chart than a resumption of the bear trend. Traders are waiting for either a strong buy signal bar or a strong breakout. They know the odds favor a bull breakout and a test of the 2018 high around 1.25.
But, there is always a 40% chance of a bear break below a bull flag and then a measured move down. The result would be a test of the 2017 low, just above 1.03.
Brexit could be the catalyst
Brexit might be near its resolution. The past 7 months of quiet trading is due to the uncertainty over the result. The monthly chart is telling traders that whatever the result, traders believe it will probably be good for the EUR/USD.
But, until there is a breakout, there is no breakout. Traders have been trading. By that, I mean they are taking profits every few days or weeks and then trading in the opposite direction. There is no sign yet that this is about to change.
Monthly S&P 500 Emini futures chart: Weak buy signal in trading range
The monthly S&P 500 Emini futures chart formed a big bull inside bar in January. It closed on its high and above the 20-month EMA. Furthermore, it retraced most of the December selloff. There are now 2 legs down from the all-time high. Two legs down in a bull trend is a bull flag.
Because the monthly chart is still in a bull trend, January is a buy signal bar. Friday was the 1st day of February. By trading above the January high, it triggered the monthly buy signal.
However, the Emini is now only back to the middle of its yearlong trading range. While the momentum in January was good, the October and December selloffs were also very strong.
February is the 1st pullback in the bear swing in 5 months. The 1st bounce typically does not get far before the market goes sideways for at least another month. Consequently, the upside over the next few months might be disappointing.
Yearlong trading range likely to continue
A Big Up move following a Big Down move creates Big Confusion. When traders are confused, they are confident of only one thing. They doubt either side is strong enough to start a trend. Therefore, they expect every strong move up and down to reverse instead of leading to a trend.
They therefore sell rallies and many scale in higher. Also, they buy selloffs and many scale in lower. Finally, because they do not believe that a trend is underway, they take quick profits.
When traders are buying low, selling high, and taking quick profits, the result is a trading range. Traders should expect a continuation of the 2018 trading range for at least several more months, and possibly all year.
Weekly S&P500 Emini futures chart: Strong entry bar after 1 bar bull flag
The weekly S&P 500 Emini futures chart has been rallying strongly for 6 weeks. This is after a collapse down to the 8-year bull trend line and a 20% correction.
Last week was a doji inside bar. That is a weak buy signal. Typically, the rally from a weak buy signal lasts only a week or two before pulling back.
Next week is therefore important. If next week is also a big bull trend bar, the odds will favor a test of 2,800 and the November high before there is a pullback.
But, it is now equally likely that next week will either be a reversal bar or a bear trend bar. If so, then the odds will favor at least a couple weeks of sideways to down trading.
Daily S&P 500 Emini futures chart: Parabolic wedge buy climax
The daily S&P 500 Emini futures chart broke above a parabolic wedge buy climax this week. But, 50% of the time, when a market breaks above a wedge, it reverses down again. In addition, the rally remains in a tight bull channel, and there are still 3 or 4 legs up. Therefore, it is forming another parabolic wedge.
But, there is no strong sell signal bar yet. Furthermore, since there were consecutive strong bull bars on Wednesday and Thursday, there will probably be at least one more 1 – 2 day rally before the bears can create a strong sell signal bar. In addition, they will probably need at least a micro double top before a swing down begins.
Friday was a bear doji. While that is a sell signal bar, it is weak. There will therefore probably be more buyers than sellers below its low. If so and the bull trend resumes, but reverses down a few days later, the bears would have their micro double top.
The 1st leg up from the crash low could therefore end within a week. However, the Emini could go sideways for 1 – 3 weeks before turning down.
A buy climax exhausts the bulls
A parabolic wedge is a buy climax. Climaxes result in exhausted bulls. In addition, the protective stop is now far below. Therefore, institutional risk managers will become increasing concerned about giving back too much profit if there is a pullback. As a result, they will begin to tell traders to start taking profits. That results in a pullback.
When profit taking is severe or protracted, the bulls will wait until the selling stops before buying again. A reasonable goal is 2 legs and about 10 bars sideways to down. If the bears are unable to create a bear trend by then, the bulls will begin to buy again.
2nd leg up likely
The rally is exceptionally strong. When a reversal up is strong, it typically has at least 2 legs up. There is no top yet, but the Emini is in a resistance zone. It will probably begin to turn back down in February.
The pattern is similar to the buy climax on the weekly chart in January, 2018. After the consecutive big bull bars, I wrote that the Emini was likely to begin a 5 – 10% correction within weeks. It sold off 10% in February last year.
The current buy climax is on the daily chart. In addition, it is in a yearlong trading range. Consequently, traders will look for a leg down in the range for a few weeks, but not a resumption of the bear trend. Traders will be eager to buy above the December low.
Trading range often has 2 legged patterns
As strong as the rally has been, it is still within a yearlong trading range. Legs in trading ranges usually have 2 or 3 legs. When the 1st leg is protracted, like this one is, traders will look for a 2 – 3 legged pullback over the course of several weeks, and then a higher low.
The 2nd leg is often about as big as the 1st. That will probably not be the case here. This is because the current rally has already gone 400 points. If the October, November, December triple top around 2,800 is the target for the 2nd leg, a 400 point rally would require the selloff from the current level to fall to 2,400. That is much more than 50% and it is unlikely, given how strong the January rally has been.