20201130-1204 Weekly Report by AB
Market Overview: Weekend Market Analysis
The SP500 Emini futures have rallied for a month, but there are problems with the rally on the daily, weekly, and monthly charts. There is a nested wedge rally at a measured move target on the daily chart.
Traders should expect a pullback to below 3400 to begin in December.
Monthly : buy climax above weak bull flag
The monthly S&P500 Emini futures chart formed a huge bull bar in November. It closed above the October high and at a new all-time high.
December gapped up, which meant there was a gap up to a new all-time high on the monthly chart. That is extremely rare. While I did not check, it might be the only time in the history of the Emini and S&P futures.
However, the gap on the monthly chart was small. Small gaps typically close before the bar is complete. This gapped closed when Wednesday dipped below the November high.
Follow-through after a breakout is importantlly close
December is important because it is the bar after a breakout. It is the follow-through bar, and its appearance can change expectations of traders for the coming months. If December is a big bull bar closing on its high, traders will expect at least 2 legs up. This is the most bullish outcome. Traders would hope for a 400-point measured move up based on the height of the 4-month trading range.
The bears want December to be a big bear bar closing on its low. Traders would then assume that November was a bull trap, and they would look for a reversal down.
Most likely, December will not be either a strong bull or bear bar. Anything other than a strong bear bar will leave traders expecting sideways to up trading in January.
Don’t forget that the High 1 buy signal bar was a bear bar
I mentioned at the end of October that October was a High 1 bull flag buy signal bar, but that it had a bear body. Also, it was a 2nd consecutive bear bar, and the bull flag was coming late in a bull trend.
That combination is not good for the bulls. Usually a bull breakout will only last for a bar (month) or two, and then there is a reversal sideways to down. The reversal down typically has at least a couple legs and lasts at least 5 bars. Since this is a monthly chart, 5 months is about half of a year. Consequently, traders should expect 2021 to be sideways to down for the 1st half of the year, whether or not the Emini continues up into January.
This particular High 1 was an inside bar after an outside bar. It is therefore also an ioi (inside-outside-inside) Breakout Mode pattern. A Breakout Mode pattern late in a bull trend is often the Final Bull Flag.
The bulls hope that any pullback will form a triangle, which would be another bull flag. However, the bears want a reversal down from a higher high micro double top with the September high.
The important point is that traders should expect that there will not be strong, protracted buying in the coming months. Instead, they should watch for a reversal down in either December or January. For example, December could rally and sell off, which would create a bear reversal bar.
Alternatively, it could simply be sideways and in a small range, and close near the open. While that is not a strong sell signal bar, it could be the start of a couple legs sideways to down.
Weekly ： wedge rally at measured move target
The weekly S&P500 Emini futures chart has had consecutive bull bars after breaking above a High 1 bull flag last week. However, the buy signal bar was a bear bar, and it was a 2nd consecutive bear bar.
This is similar to what is taking place on the monthly chart. When there is a weak bull flag coming late in a bull trend, the rally usually fails within about 2 bars. This week was the 2nd bar. That increases the chance of a reversal down next week.
Wedge rally to measured move target
There is a credible wedge rally from the September low. What makes it particularly important is that this week is also at a measured move target.
When there is a bull trend and a reversal down, the reversal down fails and the bull trend resumes. If that happens, you should assume that the reversal down was testing something.
What did it test? Look to the left. The June low was a test of the April high. The Emini reversed back up from just above that high, and therefore that high is important. There is now a gap between those 2 prices. Two important prices often lead to a measured move, which is then a 3rd important price.
If you project up from the March pandemic low to the bottom of the gap at the April high, the measured move target is 3694. The Emini poked above it on Friday, and closed just above it.
Yes, this week was also a test of the 3700 Big Round Number, but that gap is important. If the bears get a sell signal bar next week, that measured move target increases the chance of a couple legs down.
If there is a reversal down, where is support?
The September/October trading range had both a double bottom and a double top. A symmetrical trading range late in a bull trend is an area of agreement. If the market breaks above it, it usually gets pulled back to the middle or bottom of the range. That range is often the Final Bull Flag.
Daily：nested wedge rally, but no sell signal bar yet
The daily S&P500 Emini futures chart has rallied strongly from the September/October double bottom. This week broke above a 3-week trading range to a new all-time high.
But there is something wrong with the daily chart, in addition to the bad bull flags on the weekly and monthly charts. It’s the bars. In a bull trend that lasts a long time, at least half of the bars in the legs up should have closes on or near their highs. But since late October, most of the bars have closed in the middle or near the open.
Neutral bars like that are much more common when a rally is a leg in a trading range. Bull legs in trading ranges lead to bear legs.
But didn’t this week break above the 4-week range, which is at the top of the 4-month range? It did, but most trading ranges that last 20 or more bars have at least one failed breakout. That means a new high or new low that reverses.
` The longer a trading range lasts, the more likely there will be a breakout up or down that fails.`
Nested wedge rally
There is another problem with the rally. There are 3 small pushes up over the past 3 weeks. A reversal down would make traders view the rally as a wedge.
A small wedge usually leads to a minor reversal down. But this small wedge is nested within a bigger wedge that began with the October 12 high. A nested wedge pattern has a higher probability of leading to a reversal down, and the reversal down tends to be deeper and last longer. Finally, remember that this is coming at the resistance of the measured move target on the weekly chart, and the 3700 Big Round Number.
If the bears get a reversal down next week, traders should expect it to be fairly deep and last at least a couple weeks. As I wrote above, reasonable targets are the middle and the bottom of the 4-month trading range.
But what if there is no reversal? The market has been rallying strongly for a month. The bulls will look for a measured move up to 4,000 – based on the 400-point tall trading range that began in September.
Is the Emini in a new bull trend?
The question is, is the daily chart still in a trading range, or has the breakout been convincing enough so that traders believe there is now a new bull trend? Unless the bulls start to get more and consecutive bull bars closing near their highs, this week’s breakout will fail. Traders will see it as a new high in the 4-month trading range, and they will look for a reversal down. With everyone on TV so bullish, if the Emini starts down, it could fall quickly as everyone suddenly realizes that they are long at the top of a trading range.