Monthly S&P500 Emini futures candlestick chart:
Blow-off top
The monthly S&P500 Emini futures candlestick chart has the biggest bull trend bar in more than 20 bars so far this month. In addition, there has been no pullback below a prior month’s low in 14 months.
The monthly S&P500 Emini futures candlestick chart is in a strong bull trend. This month’s low is above last month’s low. In addition, the low of every month for the past 14 months is above the low of the prior month. Hence this is a 15 bar bull micro channel. It is a sign of very confident bulls, but it is now extreme.
The longest prior micro channel in the history of the S&P index was 13 months, in 1995. The odds are against this streak lasting much longer. However, since the bulls have been so eager to buy above the prior month’s low, they will be happy to buy below the prior month’s low once they get the opportunity.
Typically, the bulls will immediately buy below the low of a bar in a micro channel that lasts 5 – 10 bars. But, when one lasts longer, traders know that the risk of a violent pullback is greater. Consequently, they will hesitate, waiting to be sure that the pullback will not be a fast, deep, climatic reversal. As a result, they often wait 2 – 3 bars (here, months). Once they are confident that the pullback will not fall far and fast, they buy again. Since this bull trend is exceptionally strong, the odds are that the pullback will lead to a new all-time high within a few months.
Weekly S&P500 Emini futures candlestick chart:
Exhaustive buy climax
The weekly S&P500 Emini futures candlestick chart got to within a point of the 20 week exponential moving average in August. However, it has not touched the EMA in 64 weeks. The consecutive big bull trend bars in early January will probably be the start of an exhaustive buy climax.
The weekly S&P500 Emini futures candlestick chart has never gone 64 weeks without touching its 20 week exponential moving average. In fact, the cash index has never had a streak that long in its 95 year history. Furthermore, the weekly Dow Jones Industrial Index has never had a comparable streak in its 122 year history. While this streak can continue forever, it will not. In addition, since it is much longer than any prior streak, the odds are that the weekly chart will begin to turn down within the next few weeks. Since it is so far above its average price, it might take 5 or more weeks to get down to the 20 week EMA.
Because the bull channel is so tight, there is only a 20% chance of an immediate reversal into a bear trend. The pullback will probably be only about 5%. However, even if it is 10% and lasts several months, there is a 70% chance that it will lead to a new high within a few month of turning back up.
Daily S&P500 Emini futures candlestick chart:
Emini parabolic wedge buy climax ahead of Trump’s Mueller testimony
The daily S&P500 Emini futures candlestick chart rallied strongly in January in a series of 3 buy climaxes. Since the channel is tight, this is a parabolic wedge. The odds favor about 10 days of sideways to down trading.
The daily S&P500 Emini futures candlestick chart has gone 399 trading days without a 5% correction. In addition, it has not had a 3% correction in 451 calendar days and 304 trading days. All 3 streaks are the longest in the 20 year history of the Emini, the 95 year history of the S&P index, and the 122 year of the Dow Jones Industrial Index.
Markets reflect human behavior and therefore usually do not go far beyond what they have done in the past. This means that the odds favor a 5% pullback soon. However, because the weekly and monthly charts are so strongly bullish, any reversal will likely be a bull flag on those charts and not a bear trend. Yet, if the selloff lasts 3 months and falls 10%, the daily chart would probably be in a bear trend temporarily.
Parabolic wedge top
The Emini has been in a tight bull channel in January. In addition, the rally has had 3 surges. It is therefore a parabolic wedge. If the Emini begins to pull back next week, the high will be a parabolic wedge top.
Since the weekly and monthly charts are in tight bull channels, the bulls will quickly buy reversals. This even includes sharp reversals, like 5% in 3 days, if this were to happen.
Volatility index
The volatility index has drifted up over the past 2 weeks while the Emini keeps making new highs. This increase in volatility might be a warning that the Emini will soon begin to have 2 – 5 % pullbacks within a month or two. Furthermore, it increases the chance of a 2 – 3 day 100 point selloff. This would still be a pullback in a bull trend and not a trend reversal. It is important to understand that the word “pullback” means that the bull trend is still intact. The odds are that any selloff will lead to a new high.
I have made the point many times that the odds of a “trend reversal” on the weekly and monthly charts are small without those charts 1st transitioning into trading ranges. A trend reversal means that the bull trend has ended and a bear trend has begun. There is only a 20% risk of a trend reversal on the weekly and monthly charts in the next several months. Traders will buy any selloff. Consequently, a selloff will be a pullback and not a trend reversal.
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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 Intraday Market Update page.
Hi Al,
I have a practical question.
If you traded only options what would you do? Would you buy Put/Put spreads or other strategies? for how long?
Or maybe better to buy calls intradays until there is top formed?
So, how would you trade in this fear market?
Thank you, Al, in advance!
Murat
This is a short squeeze and it is unlikely to go much higher. I therefore would not buy calls here. However, traders will look to buy calls below the low of the prior month, at the 20 week EMA, and after a 5% correction.
The math is bad for puts unless a trader can scale in and buy 2 – 3 months out. Put buyers should wait for at least a micro double top on the daily chart. Spreads are better because of time decay. A 5% correction is about 100 points in the Emini and 10 points in the SPY. Therefore, if the SPY was at 280 once there was a credible top, he might buy a 2 month out 280/270 put spread, and he would want to pay about a 3rd of the spread (3.50 or less).
Thank you, Al.
You are right. Because I am a Weak bear. And the last week I thought about going Long in options (can’t endure a pain. From my experience it is a sign of a panic near a reversal)…
Options Scaling in is a very interesting and in-demand topic.
I like trading options because they are usually not day trades and therefore create less pressure when I place and manage the trades. This means that they do not interfere with my Emini and Forex day trading. Also, when trading on daily and weekly charts, a trader does not have to apply lots of tricks the way day traders do, and he does not need perfect trade selection and entries. That makes it easier for traders starting out.
I have a draft of a course on options, but I don’t know when I will complete it.
Al, regarding options course, it is a great news but do not hurry. Your new PA trading course is so big and deep that i think it takes a lot of time to comprehend it thoroughly (maybe a year from me).