Market Overview: Weekend Market Update
The S&P Emini finally broke below the 6 week bull channel on the daily chart. Traders should expect 2 weeks of sideways to down trading.
The 30 year bond futures is in a buy climax on the monthly chart. It will probably enter a trading range for many months.
The EURUSD Forex market is trying to get a 2nd leg up after its October rally. The bulls might need a double bottom with the November 14 low first.
30 year Treasury bond Futures market monthly chart:
Minor reversal down from yearlong buy climax, trading range likely
The 30 year Treasury bond futures market has pulled back for 3 months. On the monthly chart, November fell below the October low and triggered a buy climax sell signal.
However, with one week left to the month, the bond futures market rallied back above last month’s low. While November’s candlestick has a bear body, it is so far holding above the midpoint of the bar. November is now a buy signal bar for next month. But after 3 bear bars and a buy climax in August, this is a weak buy signal. There will probably be sellers above the November high.
Buy climaxes attract profit-takers
September and October were consecutive inside bars. They therefore formed an ii top sell setup. Traders expected at least a minor reversal down because August was a huge bull bar and it was the 3rd leg up in a parabolic wedge rally in 2019. A big bull bar late in a bull trend typically attracts profit-taking.
When there is a buy climax, the stop for the bulls is far below. Risk managers have to bring the risk back down to an acceptable level. The easiest way to do this is to reduce the size of their positions. This profit-taking typically results in at least a small pullback.
How big will the reversal down be?
In this particular case, the buy climax was unusually extreme. When that is the case, traders wonder if the pullback will be more extreme. The bulls become cautious. They are more likely to wait for more bars before buying again. They want to be confident that the profit-taking has ended.
Also, they want to be sure that the bears were unable to create a bear trend reversal. After an extreme buy climax, this process usually takes at least 5 – 10 bars. Therefore, the upside over the next several months is small.
In addition, the 2019 bull trend was exceptionally strong. A strong bull trend only rarely immediately reverses into a bear trend. There typically is a transition from a bull trend to a bear trend. This usually requires many bars. Consequently, the downside over the next few months is small as well.
If the monthly chart cannot go up or down much for several months, traders should expect it to be mostly sideways. The trading range could last all of 2020.
Bonds are in the process of forming a major top
I have written many times about the nested wedge top on the monthly chart. Bond futures will probably work lower over the next 20 years. This is true even if there is another brief new high first.
However, the top might take many years to complete. For example, the August high could end up as the head of a head and shoulders top. The left shoulder was more than 3 years ago, in July 2016. There is often symmetry with the head approximately in the middle. If that happens here, the right shoulder could come 3 years from now. Also, the bear breakout might follow a year or more after that.
While the monthly chart is creating a top that will last for 20 or more years, the current 3 year trading range could last for several more years before a bear trend becomes clear. That means that interest rates could remain low for a long time.
It is important to remember what I have said about the possibility of negative interest rates in the US. The American public will not allow the Treasury to issue bonds with negative interest rates. They will also not allow the Treasury to sell a bond to the public for $100,000, and then when it matures, give the buyer only $95,000. That is what most people mean when they talk about negative interest rates. It is simply un-American for the government to borrow money from its citizens and then charge those citizens a fee for lending the money.
EURUSD weekly Forex chart:
Weak reversal up so probably a little more sideways to down
The EURUSD weekly Forex chart formed a buy signal bar last week. It was a bull bar closing near its high, which is good. But the context was not so good.
The weekly chart has been in a bear trend for 22 months and in a tight bear channel for 14 months. Also, the week before was a surprisingly big bear bar closing on its low. Was the buy signal bar a strong enough foundation to support a rally that would reverse that selloff? It might have been, but the bulls needed a strong entry bar this past week. They did not get what they wanted.
Now traders are wondering if the 4 week selloff will continue down to the October low. This past week closed on its low. It is now a Low 1 sell signal bar for next week.
The October rally had 3 consecutive bull bars closing near their highs. This was the strongest rally on the weekly chart in the 2 year bear trend. Consequently, traders are looking for a 2nd leg up. The bulls tried over the past 2 weeks but failed.
I have been saying that the 2 week bear channel down to the November 14 low was tight. I wrote that the tight bear channel meant that the 2 week bounce was probably going to be minor. That means a bull leg in the 14 month bear channel.
Furthermore, I said that the bulls might need a micro double bottom test of the November 14 low before they could get that 2nd leg up on the weekly chart. That appears to be the case.
What about a new low in the 22 month bear channel?
Can the bears get a breakout below the October low? At the moment, it is more likely that the bulls will get a 2nd leg up to the October high and the 13 month bear trend line at around 1.12. But they may need a double bottom with the November 14 low on the daily chart. That would be a micro double bottom on the weekly chart.
Even if the bears break below the October low, traders will buy the breakout. It would be no different from any of the other new lows for almost 2 years. The bears buy back shorts at every new low and the bulls buy for a 2 – 3 week reversal up.
Monthly S&P500 Emini futures chart:
Small bull bar with room to top of bull channel
The monthly S&P500 Emini futures chart has a bull bar so far in November. Also, the gap above the October high is still open.
Next week is the final week of the month. Since Thursday is a holiday and Friday will have light trading, there is not much time left. Traders expect the month to remain a small bull trend bar.
However, if there is a selloff next week, there will be a prominent tail on the top of this month’s candlestick. That will make November less bullish. The bears will have to wait at least one more month before they can hope to create a reliable sell signal bar.
And even when they finally get a sell signal bar, it will be in a tight bull channel. A reversal down will probably only last a month or two, like all of the other selloffs over the past 2 years.
Top of bull channel is a magnet above
Monthly trend lines are very important. Every major selloff since 1929 has reversed up at a bull trend line on the monthly chart.
The tops of bull channels are also important. Draw a line from the May 2007 high to the January 2018 high. The current rally is the 3rd leg up in that bull channel. That line is around 3170. It is therefore a magnet.
When a reversal comes from a line on the monthly chart, there is usually an overshoot. Therefore, the current rally might reach 3200 or 3250 before the bulls will take profits and the bears will sell. This is true even if there is a pullback for a month or two before the Emini reaches the line. However, there will probably be sellers up there.
How big of a reversal can the bears get? Well, the 2019 rally has been in a tight bull channel. A tight bull channel usually needs to go sideways for several bars before the bears can get a significant reversal. Therefore, the downside risk over then next couple months is small.
There is another problem for the bears. Traders like to see symmetry when they draw lines. The space between the 1st 2 points for this line is much bigger than between the 2nd and upcoming 3rd point. That is a less reliable line. It therefore is less likely to lead to a significant selloff. A pause for a few months is more likely than a bear trend.
Weekly S&P500 Emini futures chart:
1st bear bar after 6 consecutive bull bars
The weekly S&P500 Emini futures chart finally had a bear body this week. This was likely since 6 consecutive bull trend bars is unusual late in a bull trend.
Also, last week’s range increased. When there is a Buy The Close bull trend and the 5th or 6th bar increases in size and closes near its high, it typically attracts some profit-taking. The stop for the bulls is far below and the bulls want to reduce their risk. The easiest way is to reduce their position size.
Since they suspect that there will be a pullback soon, they see a big bull bar as a gift. It is a great and probably brief opportunity to take unexpectedly big profits. And many do.
This typically results in a couple weeks of sideways to down trading. Traders therefore will look for a little more of a pullback over the next week or two.
A common target is the bottom of the most recent buy climax. That is the 3074.50 low of that big bull bar from last week. I have been saying that a 50 – 100 point pullback was likely. That low is 53.5 points below the high and it would meet my minimum objective.
1st pullback will be brief
When traders take profits, they do not immediately buy again. That is why I said that the pullback might last a couple weeks.
However, there has not been a pullback in 8 weeks. The bulls have been so eager to buy that they have been buying above the low of the prior week for a long time. Once they finally get an opportunity to buy below the low of the prior week, they will probably take it. That will limit the extent of the 1st reversal down.
But once the bull trend resumes, traders will pay attention to what happens on the test of the close of last week’s big bull bar. Will the bulls continue to buy and create another leg up? Or, will they be very disappointed by the pullback?
If so, the bulls who bought at the top of that bull bar will use the rally to exit their longs around breakeven. This would be a sign that they are afraid of another and bigger leg down.
If they do sell out of their longs, that selling would create a micro double top. The bears at that point would have a better chance of a deeper pullback. Their 1st target would be the July/September double top. That is the breakout point of the 2 month rally.
Stalling at the top of the weekly bull channel
I mentioned that there is a bull trend channel line around 3170 on the monthly chart. It is based on the 12 year bull channel. There are bull channels on the weekly and daily charts as well. On the daily chart, the channel began in mid-October. The top of that bull channel is around 3165.
I have mentioned the weekly channel several times recently. It began with the November 7, 2018 lower high. The current rally poked a little above the top of the channel during each of the past 2 weeks.
The weekly chart is therefore stalling at this resistance. But because the bull trend over the past 8 weeks has been in a micro channel, the bears will probably not be able to get a reversal down at this point. The best they probably can get is a small pullback, like a couple weeks of sideways to down trading. Traders typically like to see at least a micro double top before they will sell aggressively. The July 26 top is an example.
Daily S&P500 Emini futures chart:
Finally broke below 6 week bull trend channel
The daily S&P500 Emini futures chart has been in a Small Pullback Bull Trend for 7 weeks. Every pullback lasted only a day or two before the bulls regained control.
But there is something different this time. The bears finally broke below the bottom of the bull channel. That increases the chance of a couple legs sideways to down over the next week or two. This is true even if there is a brief new high 1st.
The daily and weekly charts are in buy climaxes. That typically attracts profit-takers. This rally is about as long as the several other rallies in 2019. Each was followed by profit-taking and a 5 – 8% correction.
Traders therefore expect at least a small correction this time as well. But it might only be about 2%. That is because the 6 consecutive bull bars on the weekly chart mean that the weekly bulls are very eager. They will therefore probably buy the 1st 1 – 2 week pullback on the weekly chart.
It also means that the selloff on the daily chart will probably not last very long. Additionally, it increases the chance of it not being as big as the other selloffs in 2019. That is why I have been saying that it might only be 50 – 100 points instead of 200 – 300 points.
However, after the pullback and then a new high, the bears will have a better chance of a 5 – 10% correction. This is especially true if the Emini reaches the top of the monthly channel just below 3200.
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When I mention time, it is USA Pacific Standard Time (the Emini day session opens at 6:30 am PST, and closes at 1:15 pm PST). You can read background information on the intraday market reports on the Market Update page.
