Technicals indicate the S&P 500 will fail in its breakout attempt, writes Al Brooks.

The E-mini finally broke above the late 2018 triple top to a new six-month high, however, the daily chart has been in a trading range for 16 months. Traders should therefore expect disappointment. This bull breakout will probably fail within two weeks, if not sooner.

The monthly S&P 500 E-mini futures chart is forming a third consecutive bull trend bar. However, the rally is back to the 2825 area. That has been major resistance for 16 months (see Chart below).

Emini monthly chart in bull leg in trading range

There have been two strong breakouts above this level, and both reversed down strongly. In addition, there have been many tests of this resistance that failed. The strong three-month rally is another attempt to break above.

The momentum is strong enough to make traders believe that the rally will continue up to the all-time high. But, look to the left of the chart. The monthly chart has been in a trading range for 16 months.

One of the hallmarks of a trading range is that traders repeatedly become disappointed by the lack of follow-through. No matter how strong sell-offs and rallies have been, every one of them reversed after a few months.

Will this one be different? Is the three-month rally the resumption of the nine-year bull trend? Or, is it just another strong leg in the trading range?

My 80% rule on inertia

Markets have inertia. They resist change. When the market is trending, 80% of attempts to end a trend fail. The reversal typically becomes a flag and the trend then resumes.

Similarly, trading ranges, like this one, have inertia as well. My 80% rule on inertia also applies to them. Traders should expect that 80% of attempts to break into a trend will fail, and the trading range will continue.

That is what is likely here on the monthly E-mini chart. Even if the bulls get a new high, the odds are that it will fail and reverse down. This is just like the strong sell-off in December that broke below the February 2018 low. Traders should expect reversals and a continuation of the trading range.

Every trading range eventually breaks into a trend. As strong as this leg has been, it is still more likely to be a leg in the 16-month trading range instead of a resumption of the nine-year bull trend. Therefore, the trading range will probably continue for at least several more months. Until there is a clear breakout with consecutive closes above or below the range, the odds favor reversals.

Weekly Chart Analysis

The weekly S&P 500 E- mini futures chart completely reversed last week’s selloff. It closed at a new six-month high, above the October-November-December triple top (see chart).

Emini monthly chart in bull leg in trading range

In mid-February, I wrote that nine consecutive bull trend bars on the weekly chart is extremely unusual. Typically, that leads to exhausted bulls who take some profits. The odds favored a two to three week sideways to down move beginning within one to two weeks. The past three sideways weeks met that minimum goal.

Therefore, the bulls have a reasonable chance at resuming the bull trend. That is especially true since the past week rallied to above the top of the late 2018 triple top.

Last week was a big outside down bar on the weekly chart. It was a sell signal bar for this week. But, instead of this week trading below the prior week’s low and triggering the sell signal, the week rallied strongly and broke above the bear outside down bar. That is a sign of strong bulls.

Possible head and shoulders top

If the E-mini fails to continue its breakout above that October high this week, traders will begin to wonder if the breakout will fail. The bulls will begin to take profits and the bears will sell more aggressively. The result could be a break below the low of two weeks ago and then a measured move down to between 2600 and 2700. The bears will see the lower high as the right shoulder of a head and shoulders top.

Is that likely? The weekly chart is still below the all-time high. Whenever there is a strong rally, look to the left. If that strong rally stops around a prior lower high, it might be the second leg up in a double top bear flag. Here, it would also be a head and shoulders top.

At the moment, despite the strong rally, there is still a 30% chance of a sell-off from around this level to far below the December low. A measured move down from that low would be to around 1900.

Daily Chart Analysis

The daily S&P 500 E-mini futures chart broke strongly above the October-November-December triple top on Friday. That level has been strong resistance for 16 months. Even though the bulls broke far above it in January and July last year, both breakouts led to huge reversals down (see chart).

Emini daily chart has week breakout above 2018 triple top

The momentum up over the past three months is a sign that bulls are eager to buy. Consequently, even if there is a strong reversal down to 2600 over the next two months, the bulls will be buying.

The three-month tight bull channel is strong enough so the first reversal down will be minor. That means it will probably lead to a higher low. In addition, the rally from that low will likely test the top of the current rally.

The bears will try to create a double top at that point. That will be at least a couple months from now. Until then, the down side will probably be limited to around a 50% retracement of the three-month rally. That means a test of 2600.

What about the upside? The bulls want the rally to continue up to a new all-time high. The momentum up is strong enough to achieve that. However, the context is bad. The rally is still a leg in a trading range. Consequently, traders should expect disappointing follow-through buying. Since that is likely, this rally will probably fail within a couple of weeks. Once it reverses, the E-mini will try to test the most recent higher low. That is the March 8 low of 2726.50. That is the neck line of the possible double top with the March 4 high.

If the sell-off breaks below that low, it could continue for a measured move down to the Jan. 23 low. That was the start of the tight bull channel. In addition, it is around a 50% pullback and the 2600 level, a nice round number target.

There is no top yet. This week closed at a new six-month high. While the E-mini probably will go at least a little higher, it will probably then reverse down for a couple months.

The bears need a strong sell signal bar. There is none yet. However, the bulls will probably begin to take profits within a couple of weeks. Since the rally is so extreme, the profit taking could last one to two months and fall to near the Jan. 23 low at around 2600.

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