The E-mini S&P 500 futures is maintain its bull trend, but a lower high is more likely, writes Al Brooks.

The E-mini S&P 500 futures is trying to resume its strong bull trend, but a lower high is more likely. A reasonable target for the bottom of this correction is the Feb. 11 high, which is the bottom of a gap up.

The monthly E-mini chart’s May candlestick has a bear bar and a big tail. May traded below the April low and traders bought the selloff (see chart). This was likely after four consecutive bull bars closing near their highs.

Emini monthly chart has pullback at top of 16 month trading range

However, by going below April’s low, there is less certainty of a new all-time high in the near-term. That confusion typically results in more sideways trading. After the four strong bull bars, most bears want at least a micro double top before looking for a swing down. That would take another month or two. Consequently, there is not much downside risk now.

But, May had a big range, a bear body, and a break below last month’s low. Furthermore, there is now a perfect double top with the September all-time high. These factors reduce the chance of a new all-time high this month.

When the odds of a big move up and a big move down are less, the market usually goes sideways. That is what is likely for at least the next few weeks.

Weekly Double Top Suggests Range

This week’s candlestick on the weekly S&P 500 E-mini had a big bull body after testing the 20-week exponential moving average. But, the tail on top weakens it as a buy signal bar for next week. The doji bars of the two prior weeks also reduce the chance of a strong move up this week (see chart).  The probability is against a strong rally next week.

Emini weekly chart in minor reversal down from double top

Furthermore, its range is big. As a result, the stop for the bulls buying above this week’s high will be far below. They therefore will have increased risk, reducing the risk/reward ratio.

The buy setup for bulls looking to buy with a stop has lower probability and reduced risk/reward. This means that there is an increased probability and better risk/reward for bears selling above the buy signal bar. Consequently, while this week is a buy signal bar on the weekly chart, there might be more bears above its high.

When a signal does not look quite right, fewer traders take it. In addition, more traders do the opposite, betting that the signal will fail.

A weak signal creates uncertainty, and confusion is a hallmark of a trading range. Traders know that the E-mini is searching for a bottom. They therefore are unwilling to sell too low or hold onto shorts. The bears prefer to sell rallies.

Also, the bulls are quick to get out of longs because they doubt any rally will go far. They do not want to be long at the top or buy too far above the low.

With both bulls and bears looking for quick profits, the E-mini usually goes sideways. That is what is likely over the next few weeks.

Daily Chart More Bearish

The daily E-mini chart reversed down from a double top with the September all-time high. The two-week selloff was in a tight bear channel (see chart). When that is the case, the E-mini typically will form a lower high and have at least a small second leg down.

Emini daily chart has double top bear flag and lower high major trend reversal

However, the combination of the big up move through April and the big down move in May creates confusion. Confusion usually leads to a trading range. Therefore, the E-mini might go sideways for a couple of weeks before it begins its second leg down.

Obvious targets for the bears are the bottoms of the pullbacks in the four-month rally. Additionally, the Feb. 11 high of 2723.00 is the bottom of a gap up, and it is just below the magnet of the March 25 low. Finally, the E-mini might correct 50% of the 2019 rally. That target is 2651.00.

Even if the bears get a deep pullback over the next two months, the bulls will buy it. Moreover, the odds currently favor a break above the all-time high and a test of 3,000 at some point this year.

Minor Change of Major Break

Can the selloff continue down and break below the December low? That is the neckline of the September/May double top. If it did, traders would wonder if there would be a 60-point measured move down. That would be a 40% correction.

Now, the odds are only 20%. However, if the selloff continues and accelerates, the probability will go up.

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