Al Brooks breaks down the short- and long-term technical outlook in the E-mini S&P 500.

The bodies of the E-mini futures monthly candlesticks have been shrinking for three months. This is a sign of a loss of momentum and it increases the chance of a pause in the rally (see chart). I wrote last week that because last month was a doji bar, it was a one bar trading range.

Emini monthly chart has strong bull leg in trading range

Trading ranges tend to continue, and this increases the chance of another sideways bar in April. April might test both last month’s high and low. It is currently above last month’s high. If the E-mini is to test the March low in April, it would have to reverse down in the next couple of weeks.

Can the momentum pick up again? Can April be a bull trend bar with a big body and a close above the March high? Yes, but there are several weeks left to the month. This gives plenty of time for the bears to reassert themselves. At the moment, the odds now favor a test of the all-time high in April or May.

Size Matters

If the month continues to hold near its high, the E-mini will probably make a new all-time high in April or May. However, if it turns down and the month closes near its low, the E-mini will probably be sideways to down for at least another month.

The reversal up from the 10-year bull trend line would probably lead to a new high this year. What we don’t know yet is if the rally will go straight up without a pullback or first pull back for a couple months. Traders will have a better idea near the end of April once they see whether the month is holding at the high or has reversed to its low.

Bull Flag & Expanding Triangle Top

The three-month rally has been extreme, and it is late in a 10-year bull trend. That makes the yearlong trading range a good candidate for a Final Bull Flag. Therefore, if there is a new high, the 2018 trading range will be a magnet. Any rally above 3,000 will probably get drawn back down to the middle or bottom of the yearlong trading range by the end of next year.

If there is a reversal down from a new high, there would be an Expanding Triangle top of the weekly and monthly charts. The initial target for the bears would be the bottom of the triangle, which is the December low. A selloff from a new high to that low could take many months after a reversal down.

If there is a bear trend after a reversal down from a new high, traders will look for a measured move down. The selloff will probably reach the 2014 – 2015 trading range at around 2000. This will probably happen within the next few years.

Weekly E-mini

The weekly S&P500 E-mini futures chart had a gap up this week (see chart). This is important because there were two sell signals over the past six weeks. The gap up is a sign that the bulls are not yet exhausted.

Emini weekly chart has bull breakout above 2 sell signal bars

The bull candlestick with a close near the high is a sign that the top-picking bears are giving up. The odds favored a pullback after two sell signals following a 10-week bull micro channel. But this week broke above the sell signal bar from two weeks ago. Furthermore, it closed above that high and near the high of the week.

Bull Surprise Bar

Last week represented surprisingly good buying pressure. Therefore, last week was a Bull Surprise Bar. A Bull Surprise Bar is a low probability event. It traps bears into losing shorts and bulls out of good longs. Both are desperate for a pullback to buy. The bears want to exit with a smaller loss and the bulls are eager to get long. This typically results in at least a small second leg up.

The bigger the bar is, the bigger the surprise. Last week did not have a particularly big bull body. Consequently, there is not as much desperation to buy as there might have been. As a result, the bears have a 40% chance of a reversal down next week.

For them, this week is the third leg up in a six-week micro wedge top. Also, the E-mini is testing the 2900 Big Round Number. But the bears need a strong sell signal bar next week to undo what the bulls accomplished this week. At the moment, the odds favor a test of the September 2956.00 all-time high by the end of May. It might even come within a few weeks.

Daily E-mini Analysis

The daily S&P 500 E-mini futures chart rallied last week and broke above the March 21 high (see chart). This is now the third leg up where March 4 was the first. Three legs up in a tight bull channel is a parabolic wedge.

Emini daily chart has nested wedge tops but no trend reversal yet

Furthermore, this third leg up is made of a smaller wedge. March 26 and April 1 are the first two legs up in this wedge. When the third leg in a wedge is made of a smaller wedge, there is a nested wedge pattern. A nested pattern has a higher probability of reversing down. But the bulls need either a credible sell signal bar or one or more big bear bars. Without either, the odds favor higher prices. Everyone is aware of the magnetic pull of the 2956.00 all-time high.

Much of the recent buying is from momentum bulls. They are buying because the E-mini is going up. These bulls see the magnet not far above and are betting that the E-mini cannot escape the magnetic pull. They want to ride the momentum up for a quick profit.

These traders are not buying because they think the market is cheap. Value bulls buy when they think the market is cheap and they buy more on selloff because it is then cheaper. Late in a bull trend, if the market rallies strongly, most of the buying is from momentum bulls, not value bulls. Momentum bulls want a quick profit.

In addition, momentum bulls are risk adverse. As soon as they are disappointed by a loss of momentum, they exit. Their goal is a relatively small reward, knowing the probability is high. If the risk becomes big, their math becomes bad. They will exit to avoid a growing risk.

A trader will lose money if his risk/reward becomes bad and his probability is dropping. The result often is a rush to the exits as soon as the E-mini begins to turn down late in a bull trend. The momentum bulls can exit in a panic and create a quick down draft. There were several examples in 2018.

Odds now favor a new all-time high
I have been writing since December that the bulls would probably get a new all-time high this year. Until last week, the odds favored a two-month pullback to a higher low, and then a new high later in the year.

Last week was strong enough to make the new high likely to come by the end of May. It might even come in April. However, one or two big bear days over the next few weeks could flip the odds back in favor of a two-month pullback before a new high.

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